SCHEDULE 14C
(Rule 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
[X] Definitive Information Statement
Industrial Imaging Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, $.01 par value
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
10,890,201 shares of Common Stock
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
The filing fee was calculated based on the $1,000,000
cash payment to be made to the Company in connection with
the asset sale plus a subsequent payment expected to
equal approximately $1,000,000.
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
$2,000,000
- --------------------------------------------------------------------------------
5) Total fee paid:
$400
- --------------------------------------------------------------------------------
<PAGE>
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
$
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No:
- --------------------------------------------------------------------------------
3) Filing Party:
- --------------------------------------------------------------------------------
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE>
INDUSTRIAL IMAGING CORPORATION
One Lowell Research Center
847 Rogers Street
Lowell, MA 01852
(978) 937-5400
INFORMATION STATEMENT
---------------
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD AT 10:00 A.M.
ON JANUARY 18, 2000
---------------
THIS IS AN INFORMATION STATEMENT. WE ARE NOT ASKING YOU
FOR A PROXY AND YOU ARE NOT REQUESTED TO SEND US A PROXY.
----------------
To the Stockholders of
Industrial Imaging Corporation
This Information Statement relates to a Special Meeting of Stockholders
of Industrial Imaging Corporation (the "Company" or "Industrial Imaging") to be
held on January 18, 2000 at 10:00 a.m., Eastern Standard Time, at the Lowell
Courtyard, 30 Industrial Avenue, Lowell, Massachusetts, called in connection
with the proposed sale of substantially all of the Company's operating assets to
Focus AOI, Inc. ("Focus"), a Delaware corporation (the "Transaction"). The
Special Meeting of Stockholders has been called for the purpose of considering
and voting upon the following proposals:
1. To consider and vote upon the sale of substantially all of the
Company's assets to Focus as set forth in the Asset Purchase
Agreement (attached as Exhibit A); and
2. To consider and act upon any matters incidental to the
foregoing and any other matters that may properly come before
the meeting or any adjournment or adjournments thereof.
THE BOARD OF DIRECTORS OF INDUSTRIAL IMAGING HAS UNANIMOUSLY VOTED FOR
THE TRANSACTION. THE BOARD BELIEVES THAT THE PROPOSED ASSET SALE IS IN THE BEST
INTERESTS OF THE COMPANY AND THE STOCKHOLDERS OF THE COMPANY. HOLDERS OF
7,700,758 SHARES (APPROXIMATELY 70.71%) (10 PERSONS) OF THE OUTSTANDING COMMON
STOCK OF THE COMPANY HAVE EXECUTED
<PAGE>
PROXIES TO VOTE IN FAVOR OF THE TRANSACTION AND ALL THE OTHER ITEMS PROPOSED. AS
OF DECEMBER 20, 1999 THERE WERE 10,890,201 SHARES OF INDUSTRIAL IMAGING COMMON
STOCK OUTSTANDING.
If you attend the meeting you may vote in person.
Respectfully yours,
Juan J. Amodei, Ph.D.
President
December 27, 1999
<PAGE>
INDUSTRIAL IMAGING CORPORATION
One Lowell Research Center
847 Rogers Street
Lowell, MA 01852
(978) 937-5400
Notice of Special Meeting
of Stockholders
to be held on January 18, 2000
TO THE HOLDERS OF COMMON STOCK:
This Information Statement relates to a Special Meeting of Stockholders
of Industrial Imaging Corporation (the "Company" or "Industrial Imaging") to be
held on January 18, 2000 at 10:00 a.m., Eastern Standard Time (the "Special
Meeting"), at the Lowell Courtyard, 30 Industrial Avenue, Lowell, Massachusetts,
called in connection with the proposed sale of substantially all of the
Company's operating assets to Focus AOI, Inc. ("Focus"), a Delaware corporation
(the "Transaction"). The Special Meeting has been called for the purpose of
considering and voting upon the following proposals:
1. To consider and vote upon the sale of substantially all of the
Company's assets to Focus as set forth in the Asset Purchase
Agreement (attached as Exhibit A); and
2. To consider and act upon any matters incidental to the
foregoing and any other matters that may properly come before
the meeting or any adjournment or adjournments thereof.
This Information Statement is being mailed on or about December 27,
1999 to all stockholders of the Company entitled to notice thereof
The close of business on December 20, 1999 has been fixed as the record
date for the determination of holders of the Company's Common Stock entitled to
notice of, and to vote at, the meeting or any adjournment thereof. At the close
of business on December 20, 1999, there were outstanding and entitled to vote
10,890,201 shares of Common Stock of the Company, $.01 par value per share
("Common Stock"). Each share of Common Stock has one vote. Treasury shares have
no voting rights.
-----------------------------------------------
The affirmative vote of the holders of a majority of the outstanding
Common Stock of Industrial Imaging is required for approval of the sale of
substantially all of the assets of the Company. Votes withheld from any nominee,
abstentions and broker non-votes (which result when a broker holding shares for
a beneficial owner has not received timely voting instructions on certain
matters from such beneficial holder and the broker does not have discretionary
voting power on such matters), are counted as present or represented for
purposes of determining the presence or absence of a quorum at the Special
Meeting. Abstentions and broker non-votes have no effect on whether a proposal
has been approved. Holders of 7,700,758 shares (approximately
<PAGE>
70.71%) (10 persons) of the outstanding Common Stock of the Company have
executed proxies to vote in favor of the Transaction. Such shares are sufficient
to approve the proposal.
----------------------------
THIS IS AN INFORMATION STATEMENT.
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
<PAGE>
Industrial Imaging Corporation
Information Statement
Table of Contents
<TABLE>
<S> <C>
Summary of Information Statement..................................................................................1
Proposal No. 1 - To Approve the Sale of Substantially All of the Assets of the Company............................1
The Companies............................................................................................1
Material Features of the Proposed Transaction............................................................2
Accounting Treatment of the Proposed Transaction.........................................................3
Reasons for the Proposed Transaction - Industrial Imaging................................................3
Reasons For The Proposed Transaction - Focus AOI.........................................................4
Interests of Certain Persons in or Opposed to the Transaction............................................4
Federal Income Tax Consequences..........................................................................5
Defaults on Securities...................................................................................5
Industrial Imaging Information...........................................................................7
Management's Discussion and Analysis....................................................................17
Securities Ownership....................................................................................21
Price Range of Common Stock.............................................................................23
Focus Canada Information................................................................................24
Exhibit A - Asset Purchase Agreement
Exhibit B - Industrial Imaging Corporation Financial Statements for fiscal years ended March 31, 1999 and
March 31, 1998 and six months ended September 30, 1999
</TABLE>
iii
<PAGE>
SUMMARY
This information statement is being furnished to the stockholders of
Industrial Imaging Corporation ("Industrial Imaging" or the "Company"), who will
be asked to consider and vote upon a series of proposals that, if fully
effected, shall result in the sale of substantially all of the Company's
operating assets to Focus AOI, Inc. ("Focus AOI"), a Delaware corporation, with
its principal executive offices at 101 Randall Drive, Waterloo, Ontario, Canada,
N2V 1C5, telephone number (519) 746 - 1100. Stockholders are urged to carefully
review this entire Information Statement and each of the exhibits attached
hereto and the documents incorporated herein by reference.
PROPOSAL NO. 1
TO APPROVE THE SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY TO FOCUS
THE COMPANIES
INDUSTRIAL IMAGING CORPORATION
Industrial Imaging designs, manufactures and markets automated optical,
vision and industrial imaging systems for inspection and identification of
defects in printed circuit boards ("PCBs") and distributes laser plotters and
Helios (TM) Film for creation of PCB artwork and photo tools.
The Company's asset and product base was acquired in 1992 from AOI
Systems, Inc. by the Company's subsidiary, Triple I Corporation ("Triple I")
(the Company has since changed the name of Triple I to AOI International, Inc.).
Certain members of the Company's management were pioneers in the automated
optical inspection field. These individuals developed the Company's product line
while working at Itek Corporation ("Itek"), which is now part of Raytheon
Corporation. The product line was developed through close cooperation between
Itek and Digital Equipment Corporation ("DEC"). DEC was a knowledgeable user who
funded part of the development and acted as an advisor, customer and beta site
for the prototype and initial production models, which were later marketed by
AOI Systems, Inc.
In February 1997, the Company acquired Triple I, a privately held
Delaware corporation, in a transaction whereby the shareholders of Triple I
exchanged 100% of the outstanding Triple I Common Stock, $.01 par value, for
approximately 90% ownership of the Company (the "Exchange"). As part of the
Exchange, all Triple I outstanding warrants and options were transferred to the
Company.
Prior to the Exchange, the Company was a publicly held Rhode Island
corporation known as Orbis, Inc. ("Orbis"). Orbis initially designed and
manufactured software for use by health maintenance organizations, but had not
had revenues from operations since 1992. Orbis's Common Stock, $.01 par value
per share, was listed on NASDAQ after its initial public offering in 1987, but
<PAGE>
was delisted in October 1992 when operating revenues diminished. Since that
date, the stock has been quoted on the OTC Bulletin Board, where limited trading
of the shares has occurred. Immediately prior to the Triple I Transaction, Orbis
reincorporated under the laws of Delaware, completed an 18:1 reverse split of
its Common Stock and changed its name to Industrial Imaging Corporation.
FOCUS AOI, INC.
Focus AOI is a newly incorporated Delaware corporation and is a wholly
owned subsidiary of Focus Automation Systems Inc. ("Focus Canada") an Ontario,
Canada corporation. Focus AOI was incorporated for the sole purpose of
completing the Transaction and consequently, prior to the completion of the
Transaction, has not conducted any operations and has only nominal assets and
liabilities. Focus AOI shares its sales, marketing and product development
functions with Focus Canada.
Focus Canada owns all of the shares of Focus AOI. Focus Canada has not
guaranteed in any way the obligations of Focus AOI in respect of the Transaction
including, without limitation the Earnout (see MATERIAL FEATURES OF THE PROPOSED
TRANSACTION). On completion of the Transaction, Focus Canada intends to provide
certain funds to Focus AOI, through a combination of an investment in debt and
equity of Focus AOI, to enable Focus AOI to pay the initial cash payment to
Industrial Imaging contemplated by the Agreement (see MATERIAL FEATURES OF THE
PROPOSED TRANSACTION) and to provide initial working capital to Focus AOI. There
is no ongoing obligation of Focus Canada to continue to invest funds in Focus
AOI.
MATERIAL FEATURES OF THE PROPOSED TRANSACTION
Pursuant to the terms of an Asset Purchase Agreement dated as of
November 1, 1999 (the "Agreement") among Industrial Imaging, AOI International,
Inc., a Delaware corporation and wholly-owned subsidiary of Industrial Imaging
("AOI") (Industrial Imaging and AOI are referred to collectively in this
Information Statement as the "Company"), and Focus AOI, Inc., a Delaware
corporation ("Focus AOI"), Focus AOI has agreed to purchase substantially all of
the assets of the Company (the "Assets"). Pursuant to the Agreement, the
aggregate purchase price to be paid for the Assets shall equal $1,000,000 (less
repayment of certain advances, and interest thereon, made by Focus AOI to the
Company during the period from November 1, 1999 through the closing of the
Transaction, which advances are necessary to satisfy certain obligations of the
Company existing as at November 1, 1999) payable at the closing of the
Transaction, plus an earnout amount (the "Earnout") equal to a certain multiple
of net earnings of the business purchased by Focus AOI (less repayment of
certain advances, and interest thereon, made by Focus AOI to the Company during
the period from November 1, 1999 through the closing of the Transaction
necessary to fund the continued operations of the Company through the closing).
The Earnout shall be calculated in accordance with a formula described in the
Agreement, and shall be paid not later than 90 days after the date that is four
(4) years after the closing of the Transaction. The minimum Earnout payable
under the Agreement is $1,000,000 (the "Minimum Earnout"). The Minimum Earnout
is not guaranteed by any party, but, upon the closing of the Transaction, the
Company will retain a priority security interest, subordinate only to security
interests granted by Focus AOI to financial institutions, in the Assets to the
extent of any unpaid Minimum Earnout. The remainder of the Earnout (above
2
<PAGE>
the Minimum Earnout) will also be secured by the Assets, but this security
interest will rank pari passu with the security interests held by other
creditors of Focus AOI and subordinate to security interests granted by Focus
AOI to financial institutions. The Earnout shall be reduced, prior to its
payment to the Company, by the amount of fees payable to Charles M. Leighton and
to Gene H. Weiner & Associates, Inc., who acted as brokers on behalf of the
Company with respect to the Transaction. The Earnout shall then be used first to
satisfy liabilities of the Company to certain noteholders. Industrial Imaging
intends to pay any Earnout remaining after the satisfaction of brokers fees and
noteholder liabilities to its shareholders, in the form of a cash dividend.
ACCOUNTING TREATMENT OF THE PROPOSED TRANSACTION
The Transaction will be treated as a bulk sale of assets by the Company
and an asset purchase by Focus AOI. Focus AOI will allocate the purchase price
over the Assets and depending upon that allocation might generate goodwill. In
connection with the Transaction, the Company will recognize income from the
forgiveness of certain debts.
REASONS FOR THE PROPOSED TRANSACTION - INDUSTRIAL IMAGING
Although no independent valuation of the Transaction has been made, the
Board of Directors of Industrial Imaging believes that the Transaction is fair
to, and in the best interests of, the Industrial Imaging stockholders. This
determination is based upon the Board of Director's consideration of a number of
factors including, but not limited to the following:
(a) The initial payment by Focus AOI would be sufficient to
satisfy most of the renegotiated claims of creditors.
(b) The Company's stockholders may benefit from the Earnout under
the Agreement, which will require Focus AOI to pay a certain
multiple of the net earnings of the purchased business not
later than four years after the closing. The Agreement also
requires that the Company retain a priority security interest,
subordinate only to security interests granted in connection
with post-closing third party debt financings, in the assets
of Focus AOI in the event that the Earnout is not paid in
full. In light of the fact that the Company will have already
settled most of its creditors' claims prior to or upon the
closing of the Transaction, a substantial percentage of the
Earnout, after satisfaction of certain outstanding claims of
noteholders, will then be available for distribution to the
Company's shareholders.
(c) The Board of Directors of the Company believes the sale is the
only viable course to avoid a Chapter 11 filing, which would
terminate the operations of the Company and force a
liquidation of its assets, which, in turn, would almost
certainly leave the Company's stockholders, after creditors'
claims are satisfied, with a total loss of their investment.
3
<PAGE>
(d) The Company lacks sufficient resources to support its
operations or to obtain an audit of its Financial Statements.
(e) The Board of Directors of the Company does not believe that it
could find any other buyer that would be able to consummate a
transaction with the Company quickly enough to stave off a
creditor - compelled Chapter 11 filing. Further, the Board
believes that the Transaction represents the best possible
deal for the Company's stockholders at this time.
Thus, the Board has concluded that, given Industrial Imaging's current
financial status, a sale of assets to Focus AOI, an entity that has stronger
financial capabilities, greater business opportunities and superior business
capabilities, is in the best interests of Industrial Imaging's stockholders.
REASONS FOR THE PROPOSED TRANSACTION - FOCUS AOI
Management and the Board of Directors of Focus Canada and its
subsidiary Focus AOI believe that the Transaction will benefit both Focus AOI
and the Company for a number of reasons, including but not limited to the
following:
(a) the acquisition will provide Focus AOI with a mature proven
product in a strategic electronics AOI market (PCB AOI) which
is complementary to Focus Canada's Flex Circuit inspection
product and strategic direction. The synergy of the
technologies will allow Focus AOI and Focus Canada to
integrate certain of the Company's technology (including its
patented technology) with that of Focus Canada to better
address the markets for both PCB AOI and Flex Circuit AOI.
(b) Focus Canada believes the Company's products are a good fit
with its current strategic alliances and distribution
channels, specifically in Taiwan and Japan which should lead
to increased sales levels for the Company's products.
(c) Focus Canada believes the combined technologies and
capabilities of Focus AOI and the Company will lead to
development of future competitive products for other segments
of the electronics AOI market.
(d) Focus Canada believes synergies, including cost savings, can
be created by integrating the Company's sales, marketing and
product development functions with those of Focus AOI and
Focus Canada.
(e) Focus Canada believes that the acquisition will enable Focus
Canada and Focus AOI to accelerate their presence in the
European electronics AOI marketplace at a faster pace than
could be achieved by Focus Canada or Focus AOI without the
Transaction.
4
<PAGE>
INTERESTS OF CERTAIN PERSONS IN OR OPPOSED TO THE TRANSACTION
Juan J. Amodei, President, CEO and a Director of Industrial Imaging,
and Harry Hsuan Yeh, a Director of Industrial Imaging, have collectively loaned
USD$300,000 to Focus AOI pursuant to 3-year term notes which Focus AOI required
as a prerequisite to Focus AOI entering into the Transaction, and, upon the
closing of the Transaction, Dr. Amodei and Dr. Yeh will each receive warrants to
purchase common stock of Focus Canada at an exercise price equal to the purchase
price per share paid by the equity investors in Focus Canada who have financed
the Transaction. The total value of the Focus Canada common stock issuable to
Dr. Amodei and Dr. Yeh combined upon exercise of such warrants will equal
USD$60,000 upon the closing of the Transaction.
In addition, Dr. Amodei has agreed to defer payment of amounts due him
(related primarily to earned and unpaid compensation) totaling approximately
$285,000, until the Earnout is paid to the Company. Certain other employees have
similarly agreed to defer, until the Earnout is paid to the Company, amounts due
them of approximately $45,000 in the aggregate.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the federal tax consequences of the
Transaction based on the Internal Revenue Code. This discussion is not intended
to be exhaustive and does not describe state and local tax consequences.
The Company has been advised by counsel that, for federal income tax
purposes, until dividends are paid to stockholders in connection with the
Earnout, the Transaction will not create a gain or loss to the Company's
stockholders. Although it is not anticipated that state or local income tax
consequences will vary from the Federal income tax consequences described above,
stockholders should consult their own tax advisors as to the effect of the
Transaction under state, local or foreign income tax laws.
DEFAULTS ON SECURITIES
When the Company acquired the assets and product base of AOI Systems,
Inc., the Company became responsible for $130,000 of indebtedness to certain
creditors of AOI Systems, Inc. This indebtedness incurs interest at 8.0% per
annum and became due and payable on January 30, 1995. The Company renegotiated
the note in July 1994 to require interest only payments at a rate of 8.0%, due
monthly. In 1998, the Company renegotiated the note, which was in default, to a
new note with a 57 month amortization with payments increasing during each year.
Unpaid interest was added to the new principal which amounts to $163,750. In
addition, the Company issued warrants to purchase 40,937 shares of Common Stock
of the Company at $4.00 per share. No payments of principal have been made and
the Company is in arrears on interest payments. The lender has agreed to settle
this debt and release its security interest in the assets of the Company upon
payment of $135,000.
In December 1992, the Company received $50,000 from a stockholder in
return for a subordinated promissory note bearing an interest rate of 8.4% per
annum, due on December 31, 1996. The note provides that the Company is in
default if the amount due is not received within 90 days of the maturity date.
Upon an event of default, the noteholder may, upon written notice to the
5
<PAGE>
Company, declare the note immediately due and payable. The note has not been
repaid. The Company has not received any demand notices. The Company is still
negotiating with the stockholder in an effort to reach an agreement on repayment
terms.
From August 1993 through June 1995, various stockholders of the
Company, including Dr. Harry Hsuan Yeh, Mr. Joseph Teves, the Massachusetts
Technology Development Corporation (the "MTDC") and the Massachusetts Community
Development Finance Corporation (the "CDFC"), loaned the Company an aggregate of
approximately $1,200,000 to help fund operations. These loans were made pursuant
to various promissory notes with various due dates through August 22, 1999.
These notes provide for interest at per annum rates ranging from 8.4% to 10%. In
February 1996, these noteholders agreed to convert the principal and interest
due on the notes into 1,270,637 shares of Common Stock of the Company, on the
basis of one share of Common Stock for every one dollar of debt converted. Dr.
Yeh and Mr. Teves did not convert all of their outstanding debt and each
received a promissory note for $100,000 bearing interest rates of 10% and 8.4%
per annum, respectively, for the amounts due to them from the Company. The
maturity date for the notes to Dr. Yeh and Mr. Teves was October 23, 1996. The
notes provide that the Company is in default if the amount due is not paid
within 90 days of the maturity date. Upon an event of default, the noteholder
may, upon written notice to the Company, declare the note immediately due and
payable. Dr. Yeh also forgave a $100,000 loan to the Company in return for a
warrant to purchase 150,000 shares of Common Stock of the Company, exercisable
until February 6, 1999 at $1.00 per share which was recorded as paid in capital
on the balance sheet. In November, 1997 Mr. Teves forgave a portion of the note
in return for exercising warrants to purchase 196,691 shares of Common Stock of
the Company. The Company has not received any demand notices and the noteholders
have agreed to convert the notes and accrued interest into equity at $.50 per
share contemporaneously with the closing under the Agreement.
In November 1995, the Company completed a 1995 Bridge Financing ("1995
Bridge Financing") as part of the 1996 Private Placement, whereby certain
affiliates loaned $255,000 to the Company in return for $255,000 in subordinated
promissory notes bearing an interest rate of 10% per annum, due June 6, 1996,
and warrants to purchase 250,000 shares of Common Stock, exercisable until
November 1998, at an exercise price of $1.00 per share. The following affiliates
participated in the 1995 Bridge Financing: Dr. Juan J. Amodei, Dr. Joseph
Bordogna, Mr. Joseph Teves and Polaroid. To date, $150,000 has been repaid
towards the outstanding balance. The notes provide that the Company is in
default if the amount due is not paid within 90 days of the maturity date. Upon
an event of default, the noteholder may, upon written notice to the Company,
declare the note immediately due and payable. The Company has not received any
demand notices from the noteholders. Mr. Teves and another noteholder have
agreed to convert their notes and accrued interest into equity at $.50 per share
contemporaneously with the closing under the Agreement. The remaining
noteholders have agreed to defer payment of the notes and accrued interest until
the "Earnout" payment is received.
In December 1996, Dr. Harry Hsuan Yeh loaned $150,000 to Triple I, in
return for a twelve-month promissory note. On January 15, 1997, this note was
converted to a two year subordinated promissory note, bearing an interest rate
of 10% per annum, which was issued to Dr. Yeh along with 44,100 shares of Common
Stock. Dr. Yeh has agreed to defer payment of the note principal until the
6
<PAGE>
Earnout is received, and to convert the accrued interest into equity at $.50 per
share contemporaneously with the closing under the Agreement.
On January 22, 1997, Dr. Yeh loaned another $50,000 to the Company in
exchange for a subordinated promissory note and 14,700 shares of Common Stock.
Dr. Yeh has agreed to convert the note and accrued interest into equity of $.50
per share contemporaneously with the closing under the Agreement.
In February 1997, the Company commenced the 1997 Bridge Financing and
sold five units ("Units"), each Unit consisting of a $50,000 subordinated
promissory note bearing an annual interest rate of 10% ("Bridge Notes") and
10,714 shares of Common Stock. Aggregate gross proceeds to the Company were
$250,000 as of February 14, 1997. The Bridge Notes are payable two years after
the date of the Bridge Notes and payment is accelerated in the event the Company
raises a certain amount of equity financing. The noteholders have agreed to
accept payment of half of the principal outstanding and to defer payment of the
balance of the notes and accrued interest until the Earnout is received.
As a result of the conversions to Common Stock of the Company referred
to above and the conversion of certain other liabilities (including liabilities
to certain individuals to whom the Company owes deferred and unpaid
compensation) into Common Stock of the Company at $.50 per share upon the
closing under the Agreement (collectively, the "Conversions"), the Company
expects to issue approximately 665,000 shares of Common Stock. Based on the
10,890,201 shares of Common Stock outstanding before the closing of the
Transaction, the Conversions will result in a 6.1% dilution in the share
ownership of the current stockholders of the Company.
SELECTED FINANCIAL INFORMATION
The following table shows a pro-forma balance sheet for the Company at September
30, 1999 assuming the Transaction was accomplished as of that date.
As at 9/30 Proforma
---------- --------
Total Assets $1,309,257 0
Accounts payable $1,461,872 0
Notes payable $1,049,770 $380,000
Other liabilities $1,165,968 $422,019
Shareholders' equity ($2,368,083) ($802,019)
This table presumes the payment by Focus AOI of $1,000,000 at the closing of the
Transaction and that such proceeds will be used to pay off substantially all of
the liabilities of the Company.
7
<PAGE>
INDUSTRIAL IMAGING INFORMATION
THE FOLLOWING SECTION PROVIDES INFORMATION ABOUT THE COMPANY AND ITS
PRODUCTS THAT PRE-DATES THE TRANSACTION. UPON THE CLOSING OF THE TRANSACTION
UNDER THE AGREEMENT, THE COMPANY WILL TRANSFER ALL OF ITS CURRENT OPERATIONS AND
PRODUCTS TO FOCUS AOI.
The Company designs, manufactures and markets automated optical, vision
and industrial imaging systems for inspection and identification of defects in
printed circuit boards ("PCBs") and distributes Laser Plotters and Helios (TM)
Film for creation of PCB artwork and photo tools. Members of the Company's
management were pioneers in the field of automated optical inspection of PCBs.
These individuals developed the product line while working at Itek, now a part
of Raytheon Corporation, through close cooperation between Itek and DEC. The
prototype and initial production models developed by Itek and DEC were later
completed and marketed by AOI Systems, Inc., which sold its assets and product
base to the Company's subsidiary, Triple I (now known as AOI International,
Inc.)
Virtually all electronic equipment uses PCBs, which contain conductors
that interconnect electronic components. As such, PCBs are essential parts to
consumer electronic and automotive products, telecommunications and computer
components, industrial and medical equipment and military and aerospace
applications. However, PCBs are susceptible to conductor defects, such as
electrical shorts, open circuits and insufficient or excessive conductor widths,
which interfere with the interconnections between electronic components attached
to the finished boards. Moreover, the trend is towards the placement of more
complex miniaturized components in greater surface density and having decreased
conducting line widths. To avoid and cure defects, PCB manufacturers have sought
the use of automated optical inspection and remote sensing to satisfy industry
demands for the precise quality of finished PCBs and assemblies. The Company has
already developed an installed base of customers in the United States, Europe
and Asia, which include some of the largest PCB manufacturers in Sweden, France,
Germany and Japan.
HISTORY
The Company's asset and product base was acquired in 1992 from AOI
Systems, Inc. by the Company's subsidiary, Triple I. Certain members of the
Company's management were pioneers in the automated optical inspection field.
These individuals developed the Company's product line while working at Itek,
which is now part of Raytheon Corporation. The product line was developed
through close cooperation between Itek and DEC. DEC was a knowledgeable user who
funded part of the development and acted as an advisor, customer and beta site
for the prototype and initial production models, which were later marketed by
AOI Systems.
In February 1997, the Company acquired Triple I, a privately held
Delaware corporation, in a transaction whereby the shareholders of Triple I
exchanged 100% of the outstanding Triple I Common Stock, $.01 par value, for
approximately 90% ownership of the Company (the "Exchange"). As part of the
Exchange, all Triple I outstanding warrants and options were transferred to the
Company.
8
<PAGE>
Prior to the Exchange, the Company was a publicly held Rhode Island
corporation known as Orbis, Inc. Orbis initially designed and manufactured
software for use by health maintenance organizations, but had not had revenues
from operations since 1992. Orbis's Common Stock, $.01 par value per share, was
listed on NASDAQ after its initial public offering in 1987, but was delisted in
October 1992 when operating revenues diminished. Since that date, the stock has
been quoted on the OTC Bulletin Board, where limited trading of the shares has
occurred. Immediately prior to the Triple I Transaction, Orbis reincorporated
under the laws of Delaware, completed an 18:1 reverse split of its Common Stock
and changed its name to Industrial Imaging Corporation.
THE PCB INDUSTRY
PCBs are the basic interconnecting platforms for the electronic
components that comprise most electronic equipment. PCBs contain the electronic
circuitry required to interconnect those components which, when operating
together, perform a specified function. An assembly of one or more
interconnected PCBs working together form an essential part of most electronic
products. The design of conductor patterns is developed with the help of a
Computer-Aided Design ("CAD") package, and later optimized for manufacturing at
the PCB manufacturing plant by using a Computer-Aided Manufacturing ("CAM")
system.
PCBs are manufactured through a series of complex steps. Generally, a
board is made of one or more layers of fiberglass (or other material with
insulating qualities) laminated with a conducting material. Holes are then
drilled into the board in a specific pattern and the inner part of each hole is
plated with conducting metal. The board or layer is then coated with a thin
layer of light-sensitive material ("photoresist"). A transparent film containing
the desired circuitry pattern corresponding to the drilled pattern on the board
("production phototool"), which has been either copied from an artwork master or
produced directly by a photoplotter connected to a CAD/CAM data base, is then
laid on the photoresist. The board or layer is then exposed to light, which
transfers the conductor pattern from the production phototool to the
photoresist. Subsequent development of the photoresist and a chemical etching
process leave the desired conductor pattern printed on the board after excess
conducting material is removed. PCBs may be single-sided or double-sided, and
more complex PCBs may be multilayered.
PCBs are susceptible to conductor defects, such as electrical shorts,
open circuits and insufficient or off-measure conductor widths, which may impair
or interfere with the electrical interconnections between electronic components
mounted on the finished boards. The trend towards more complex and compact
electronic products that utilize large-scale integrated circuits requires the
production of high-density PCBs with finer conductor lines, reduced spacing
between those lines and multiple layers. For such complex multilayer boards,
production yield drops dramatically as the number of likely defects increases,
unless in-process inspection is used. Inspection is required throughout PCB
production to identify such defects, which are then repaired, if possible, or
discarded. Early detection of these defects increases the possibility of
successful repair and reduces the number and cost of unusable boards.
9
<PAGE>
PRODUCTS
The Company's current products are automated vision systems sold to the
PCB manufacturing industry. The Company's automated vision systems are quality
control and yield enhancement tools used for automated optical inspection of
PCBs to determine the presence of flaws such as conductor breaks, short
circuits, missing features and conductor width violations at various stages of
the PCB manufacturing process. In addition, the Company's automated vision
systems can generate statistical reports of defects in real-time to assist in
the control of the PCB manufacturing process, which can result in substantially
improved yields. These improved yields, in conjunction with the advantages in
quality control offered by the Company's automated vision systems, provide a
major economic incentive for companies in the PCB industry to purchase and use
the Company's products. The Company estimates that the market size of the PCB
industry is in excess of $30 billion.
The Company presently offers "in-line" systems capable of inspecting
almost any product at speeds ranging from three square feet per minute to over
sixty square feet per minute, with current prices that range from $250,000 to
approximately $500,000 for some of the models from the Company's AOI-2500 Series
of products.
PCB AUTOMATED OPTICAL INSPECTION SYSTEMS
Each of the Company's AOI systems consists of an
optomechanical/scanning and a processing unit. The optomechanical unit includes
a moving platform that carries the PCB or artwork being inspected, and a
scanning unit which acquires an image of the board, digitizes it and transmits
it to the electronic processing unit. The electronic unit processes and enhances
the image to allow efficient analysis and interpretation of the acquired images.
The proprietary structure of the electronic logic unit enables real time
parallel processing, a requirement for performing each defect detection at very
high speeds.
The Company's AOI systems incorporate both the "design rule check" and
"reference comparison" methods of inspection. The design rule check method
involves inspecting the circuitry of PCBs pursuant to a pre-programmed algorithm
and detecting defects by applying prescribed rules to find flaws in the pattern
of the circuitry. The reference comparison method involves an intelligent
comparison of the subject PCB to a perfect "golden" board or to circuit pattern
representations stored in a CAD or CAM database.
The Company's systems can easily be integrated into the production
processes of most PCB manufacturing facilities and can be employed at several
stages during PCB manufacturing to inspect the artwork design master, the
production photo tools, the photoresist before the etching, the etched inner
layers before lamination and the outer layers before attachment of electronic
components. The systems are designed for operational simplicity and require no
special skills or experience to operate. The design of each system permits easy
maintenance and service. As a result, the Company believes that the use of its
AOI systems significantly reduces the overall production costs of PCBs.
10
<PAGE>
AOI-190 SERIES
The AOI-190 Series was the Company's basic optical inspection system,
which has been replaced by the AOI-2500 Series. The AOI-190 Series provided
manufacturers of PCBs with a means to inspect PCB products for quality and
analyze the information to achieve higher yields at an economical price. The
AOI-190 inspection system provides a number of special features that clearly
distinguish it from its competitors, including but not limited to the following:
- The in-line conveyorized transport provides automated
operation when linked to commercially available handling
equipment. Communication is maintained between the host
computer and the multi-functional evaluation/repair station
(described below). Part identification is achieved through a
bar code labeling device so that critical information moves
throughout the system with reduced possibility of error, and
tracking of parts and information throughout the manufacturing
facility can be automated;
- The linking of the AOI-190 inspector to the evaluation/repair
station enables the customer to set-up or repair products
while inspection is being conducted on the inspector with no
interruptions or waiting periods. This feature significantly
enhances throughput. In addition, management believes the
AOI-190 is the only system on the market in which throughput
can be increased and features added by software and hardware
upgrades that are not expensive, and which do not require
major design changes, such as those offered by the
competition. This is due to the open architecture and
modularity inherent in the Company's AOI-190; and
- AOI-190 can be interfaced to most-available CAM systems to
permit direct "downloading" of set-up data.
AOI-2500 SERIES
The AOI-2500 Series is a newer generation of automatic optical
inspectors designed to maximize productivity in demanding PCB operations. The
series includes three models, the AOI-1900, the AOI-2500, and the AOI-3200
depending on the width of the PCB's being inspected. Each model has the option
of a standard or a high speed version. These models currently range in price
from $300,000 to $500,000.
The AOI-2500 has a mechanical transport which enables it to be placed
in-line in the manufacturing process. The AOI-2500 Series inspectors have the
same overall functionality as the AOI-190 Series inspectors, which it replaced,
but with a significantly enhanced level of both performance and modularity. In
particular:
- The AOI-2500 systems have an improved illumination system and
higher resolution cameras, which permit it to inspect product
with smaller features than can be inspected with the AOI-190,
and it can find much smaller defects.
11
<PAGE>
- The AOI-2500 systems have a wider range of speeds than the
AOI-190, with much higher speeds available for inspecting the
more standard PCB designs.
- The AOI-2500 systems have enhanced image processing
electronics and more general purpose processing power, which
enable it to detect a wider range of defects.
Due to the modularity of the design and the fact that the mechanical
portions of the machines in this series are identical, the customer can choose
the lowest price model that can meet its requirements without risking
obsolescence as either the width of their product changes, or the factory
throughput increases. This is a further extension of the Company's philosophy of
obsolescence-proof machines through the ability to continuously upgrade.
AOI ER 35-36 EVALUATION AND REPAIR (E/R) STATION
The AOI E/R Station enables the user to view, classify and repair
defects as well as create inspection set-up files without interrupting ongoing
inspection at the inspection station. Ergonomically designed, the user may
position the E/R Station's display monitors for optimum viewing comfort and
easily access the defective PCB for repair. Convenient bar code labeling
facilitates defect evaluation and eliminates inspection data confusion.
Automated camera positioning precisely displays a magnified, crisp image of
artwork and PCBs and of each reported defect on a high-resolution color monitor,
significantly reducing operator fatigue.
A computer generated reticle offers very precise measurement of
defects. Defects requiring repair or additional evaluation may be marked or
optionally photographed with a Polaroid freeze-frame camera for further review.
Video recording of complete inspection data is also available. The inspection
station defect report for the PCB under evaluation is simultaneously displayed
on a separate screen. This report includes defect number, location and type of
defect. To maximize throughput, defects are automatically sorted by user defined
levels of severity. Additionally, defects may be further classified for yield
analysis and process control using the included SPC software package, which can
produce numerous reports. The Company's E/R Station and series of inspection
stations combine to provide a complete automated optical inspection system for
real-time process control and yield improvement.
POLAROID AGREEMENT
On November 28, 1994, the Company and Polaroid entered into the
Polaroid Agreement. Under the Polaroid Agreement, Polaroid and the Company are
granted royalty free access to each others' patents, technology and know-how for
use in their respective fields of business for a period of eight (8) years. The
Company is also granted the exclusive right to market and sell Helios(TM) Film
to the PCB market. To maintain this exclusive right, the Company is required to
achieve certain performance milestones, which include sales requirements for the
Helios(TM) Film and for the sale of laser plotters. On January 7, 1997, the
Company and Polaroid agreed that Polaroid would not act with respect to the
quarterly performance milestones under the Polaroid Agreement until May 31,
1997, the date by which the annual performance milestones had to have been met.
No such performance milestones apply to Triple I's agreement with Polaroid
granting it access to Polaroid's other technology. The consequence of failing to
achieve the annual performance milestones by May
12
<PAGE>
31, 1997 would be that the Company's exclusive right to sell and market the
Helios(TM) Film to the PCB market could, at Polaroid's option, be converted to a
nonexclusive right. The Company and Polaroid were involved in a dispute relating
to whether the Company did in fact meet its milestones under the Polaroid
Agreement. The Parties resolved this dispute by an Amended and Restated License
and Collaboration Agreement dated as of February 11, 1999, pursuant to which the
Company's exclusive right to sell and market the Helios(TM) Film to the PCB
market was converted into a nonexclusive right.
POLAROID's HELIOS(TM) FILM AND PLOTTERS
Polaroid has developed the Helios(TM) Film, a dry process film with
many superior performance characteristics compared to the imaging films
currently being used in the manufacture of PCBs. The Polaroid product is
expected to be less prone to deterioration with use than silver halide and
diazo. This permits repeated use of the Helios(TM) Film as both master and
phototool, eliminating the current practice that often requires both tools. This
should also eliminate most defects introduced by the relatively poor quality of
diazo. The Helios(TM) Film also shows promise for imaging PCB designs with very
small features, performance difficult to achieve with present technology.
As the Helios(TM) Film is a dry process product, potential customers
will benefit from elimination of chemicals and their effluent, a major concern
in an industry that is closely scrutinized by environmental agencies. The dry
process film also eliminates the need for "dark room" facilities for creating
the photo tools. The film is marketed under private label. The Company also
distributes laser plotters under a private label. The plotter for recording on
Helios Film was developed in cooperation between Polaroid and Heidelberg
(Linotype) for the graphic arts industry, and later modified by the Company for
use in the PCB industry. Both products were introduced in the quarter ending
December 31, 1996. Certain problems were encountered during field tests, which
required delaying further trials until such problems could be resolved. At the
present time, these products are not being used in the field.
PRODUCTS UNDER DEVELOPMENT
The Company currently has an engineering and product development staff,
and a group of customer support engineers, who assist the Company's customers in
integrating the Company's products into the customer's work environment. This
engineering work provides the Company an opportunity to keep abreast of new
market opportunities for the Company's technologies. During the fiscal years
ended March 31, 1999, March 31, 1998 and March 31, 1997, the Company's
expenditures on research and development amounted to $677,296, $344,068 and
$440,207, respectively (net of any cost reimbursements). In light of the current
financial circumstances of the Company, its development efforts have been
significantly reduced.
CUSTOMERS
The Company's customers include manufacturers of PCBs, both
domestically and internationally. The Company sells to a limited number of
customers as the Company's market is dominated by a few major companies. For the
year ended March 31, 1999 ("Fiscal 1999"), the
13
<PAGE>
Company had sales to five customers that accounted for 17%, 14%, 13%, 12% and
11% of revenues. For the year ended March 31, 1998 ("Fiscal 1998"), the Company
had sales to three customers that accounted for 40%, 17% and 11% of revenues.
For the year ended March 31, 1997 ("Fiscal 1997"), the Company had sales to four
customers that accounted for 28%, 25%, 15% and 12% of revenues.
During Fiscal 1999, Fiscal 1998 and Fiscal 1997, the Company's foreign
revenues accounted for 65%, 66% and 80%, respectively, of the Company's
revenues. These sales were made primarily in Europe. The high percentage of
foreign revenues was due to the existence of an established network of
distributors in Europe, along with market representatives in Europe for the
Company's products, and the limited resources available to the Company to market
its products in the United States. Although the Company generally requires
advance deposits or letters of credit from customers, the Company sometimes
extends credit to its foreign customers and collection may be more difficult in
the event of a default.
SALES AND MARKETING STRATEGY
The Company's strategy has been to emphasize the broad range of
competitive performance and cost advantages of its products and the ability to
upgrade systems because of their modular designs. Because of financial
constraints during the past twelve months, the Company has been unable to make
progress on its strategic goals. Key elements of the Company's marketing
strategy have included:
- emphasizing product performance advantages such as in-line
conveyorized material handling, ease-of-use, high throughput,
high reliability, flexible, affordable service policies and
upgrade paths and a more cost-effective solution;
- expanding the Company's direct sales force in the United
States, particularly on the west coast; and
- increasing international sales through additional support of
the Company's existing representative and distributor network,
including joint seminars, sales calls and product showings and
the addition of distributors in other parts of the world.
The Company currently employs one full-time, in-house, employee
dedicated to sales and marketing. In addition, the Company relies upon the
efforts of sales representatives located in Europe and Asia. The Company has
promoted its products through institutional advertising, distribution of product
literature and promotional videotapes throughout the industries its products
service, and exhibits and product presentations at industry and trade shows,
such as Productronica, the Institute for Interconnecting and Packaging
Electronic Circuits (IPC) and the Japan Printed Circuit Association (JPCA).
COMPETITION
The optical inspection systems industry is intensely competitive. The
Company competes with many companies in the United States and Europe, several of
which have substantially greater financial, technical, sales and managerial
resources than the Company and may be able to adapt
14
<PAGE>
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and sale of their
products than the Company. The Company believes that in the future the principal
competitive factors will be product functionality and performance (e.g., speed,
ease of use, accuracy and reliability), the development of improved products
through research and development, customer support services, customer relations
and price. No assurance can be given that the Company or Focus AOI will compete
successfully with existing or potential future competitors.
The Company believes that its products enjoy significant technical
advantages over those of its competition for the following reasons:
- RELIABILITY AND LIMITED DOWN-TIME. The Company believes that
its products enjoy significantly higher reliability and less
down-time than those of its competition. These benefits can be
attributed to the more advanced in-line design of the
Company's products, which employ few moving parts, and are
therefore less prone to equipment failures, and the
availability of direct diagnostic links, via modem, whereby
the Company's in-house service technicians can diagnose and
troubleshoot the Company's products in the field directly from
the Company's facilities.
- VERSATILE PRODUCTS THAT CAN BE EASILY UPGRADED. The Company's
products are designed to be significantly less prone to
obsolescence than those of its competition. Unlike those of
the Company's competition, the Company's products are designed
to be more highly dependent upon software with a very modular
hardware design that may be easily upgraded to add more
features.
- INCREASED ACCURACY AND HIGHER THROUGHPUT. The Company believes
that its products, as a result of its unique in-line system
with multiple stationary cameras, achieve a higher throughput
at most levels of resolution, resulting in enhanced
productivity and overall performance.
- COMPLETE INTEGRATION OF DESIGN, INSPECTION AND REPAIR SYSTEMS.
The Company's products together allow for the integrated
implementation of a complete automated inspection system for
real-time process control and yield improvement through
inspection, evaluation and repair. When combined with the
laser plotters and advanced Helios(TM) Film, the Company's
product line has the added advantage of offering a complete
integrated solution to the "front needs" of PCB manufacturers.
BACKLOG
The Company's backlog for products and services was $0 at September 30,
1999 and approximately $420,000 at March 31, 1999, and $1.8 million at March 31,
1998 (of which $200,000 represented plotters), compared to approximately $1.5
million at March 31, 1997. The Company defines backlog to include only those
systems, accessories, upgrades and service agreements with respect to which firm
purchase orders have been received. Cancellations of product purchase orders
15
<PAGE>
are sometimes subject to penalties, depending upon the time of cancellation.
Although a significant indicator of business levels, backlog is not necessarily
representative of future sales.
MANUFACTURING
The Company's manufacturing work force consists of a small group of
individuals who are each trained to cover several areas of production. Emphasis
is on performing final assembly, test and integration while maintaining critical
skills in each aspect of production: machining, PCB assembly and rework, cable
fabrication, electric-mechanical subassembly, optical alignment and electrical
test.
The Company's systems have a number of highly complex components.
Although the Company manufactures some of the subassemblies used in its systems,
most are purchased from unaffiliated subcontractors, typically to the Company's
specifications. None of the Company's suppliers are obligated to provide the
Company with any specific quantity of components or subassemblies over any
specific period. Certain of the components and subassemblies included in the
Company's products are obtained from a limited group of suppliers.
GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
The Company's products and worldwide operations are subject to numerous
governmental regulations designed to protect the health and safety of operators
of manufacturing equipment. In particular, the European Union ("EU") has
recently issued regulations relating to electromagnetic fields, electrical power
and human exposure to laser radiation. The Company believes that its products
currently comply with all applicable material governmental health and safety
regulations, including those of the EU, and with any voluntary industry
standards currently in effect.
PATENTS AND PROPRIETARY INFORMATION
The Company holds four United States patents, expiring between February
2002 and September 2009. The Company also holds two patents issued in Israel and
England, expiring in June 2004.
The Company's products require technical know-how to engineer and
manufacture and are based, in part, upon proprietary technology. To the extent
proprietary technology is involved, the Company relies on patents, copyrighted
software and trade secrets that it seeks to protect, in part, through
confidentiality agreements.
EMPLOYEES
As of March 31, 1999, the Company had twenty-six full-time employees
and part-time employees along with six independent contractors, of which ten
were in sales, marketing and service, six were in engineering and product
development, four were in administration and finance, and twelve were in
manufacturing. In April, 1999 the Company placed ten employees on furlough and
through September 30, 1999 has operated with certain employees working only
part-time. During this period a total of seven employees have left the
employment of the Company.
16
<PAGE>
None of the Company's employees are represented by a labor union. The
Company considers its relationships with its employees to be satisfactory.
DESCRIPTION OF PROPERTIES
The Company has maintained its corporate headquarters, executive
offices and principal research, developing, engineering and manufacturing
facilities in approximately 14,000 square feet in Lowell, Massachusetts pursuant
to a renewed lease as of December 1, 1995, which expired on November 30, 1998.
The Company's manufacturing operations in this facility occupy 6,000 square feet
of space. The Company has been occupying the space on a month-to-month basis
since the lease termination. The minimum annual rental for these premises is
approximately $119,000. The Company is responsible for payment of real estate
taxes, which are approximately $31,000 per year, and maintenance. The Company
believes that these facilities are adequate to meet its current needs.
LEGAL PROCEEDINGS
Neither the Company nor Focus AOI is involved in any litigation of a
material nature.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Industrial Imaging Corporation designs, manufactures and markets
automated optical, vision and industrial imaging systems for inspection and
identification of defects in PCBs and laser plotters for creation of PCB artwork
and photo tools. Members of the Company's management were pioneers in the field
of automated optical inspection of PCBs. These individuals developed the
Company's product line while working at Itek, now a part of Hughes Corporation,
through close cooperation between Itek and DEC. The prototype and initial
production models developed by Itek and DEC were later completed and marketed by
AOI Systems, Inc., a predecessor to the Company's subsidiary, Triple I (now
known as AOI International, Inc.).
The following discussion and analysis should be read in conjunction
with the Financial Statements of the Company (including the Notes thereto)
commencing on page F-1 of this report.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999 ("FISCAL 1999") COMPARED TO THE YEAR ENDED MARCH 31,
1998 ("FISCAL 1998")
Revenues for Fiscal 1999 were $4,007,271, as compared to $2,305,209 for
Fiscal 1998, an increase of $1,702,062 or 73.8%. Product revenues were
$3,505,920 in Fiscal 1999, as compared to $1,896,524 for Fiscal 1998. This
increase was due primarily to an increase in the number of units sold. Service
revenues were $501,351 in Fiscal 1999, as compared to $408,685 in Fiscal 1998.
This increase was due mostly to increased levels of services performed.
17
<PAGE>
Cost of revenues for Fiscal 1999 was $3,678,295, as compared to
$2,638,176 for Fiscal 1998, an increase of $1,040,119 (39.4%), resulting from
the increase in sales volume. Gross profit was $328,976 (8.2% of revenue) in
Fiscal 1999, as compared to gross loss of $332,967 (14.4% of revenue) in Fiscal
1998. This was due primarily to the spreading of manufacturing and overhead
costs over a larger revenue base.
Research and development expenses were $677,296 (16.9% of revenue) in
Fiscal 1999, as compared to $344,068 (14.9% of revenue) in Fiscal 1998. This
increase of $333,228 was primarily due to increases the engineering staff and
related costs and the finalizing of a contract with the Company to research
optics, and recording of approximately $140,000 of cost reimbursements as an
offset to and decrease of research and development expense in Fiscal 1998.
Sales and marketing expenses were $777,016 (19.4% of revenue) in Fiscal
1999, as compared to $545,097 (23.6% of revenue) in Fiscal 1998. This increase
of $231,919 was due primarily to increased staffing, expenses of operations
undertaken in the UK and the increase in depreciation for demonstration
equipment acquired under capital leases during Fiscal 1999.
General and administrative expenses were $752,661 (18.8% of revenue) in
Fiscal 1999, as compared to $1,044,751 (45.3% of revenue) in Fiscal 1998. This
decrease of $292,090 was primarily due to a decrease staffing and related costs
and a compensation charge of $125,000 in Fiscal 1998 that related to warrants
exercised at a discount.
Interest expense, net was $152,389 in Fiscal 1999, as compared to
$146,314 in Fiscal 1998. Other income was $1,960 in Fiscal 1999 and other
expense was $20,357 in Fiscal 1998 consisting primarily of taxes offset by
favorable currency translations.
Due to the uncertainty of realizing the tax benefits of net loss
carryforwards, no provision for income tax benefit was made for either Fiscal
1999 or Fiscal 1998.
The net loss decreased to $2,028,426 in Fiscal 1999, as compared to
$2,433,554 in Fiscal 1998. This decrease was primarily due to the aforementioned
increase in sales resulting in an increase in gross profit offset partially by
an increase in operating expenses.
COMPARISON OF THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Net revenues for the six months ended September 30, 1999 were $428,359,
as compared to $2,633,542 for the same period in 1998. Product revenues
decreased to $172,288 for the six-month period ended September 30, 1999 from
$2,431,460 for the same period in 1998 due to the decrease in the number of
units sold. Service revenues increased from $202,082 for the first six months of
Fiscal 1999 to $256,071 for the same first six months of the year ending March
31, 2000 ("Fiscal 2000").
Cost of revenues for the first six months of Fiscal 2000 was $541,515
compared to $2,000,636 for the same period in Fiscal 1999. Primarily as a result
of the decreased revenues, there
18
<PAGE>
was a gross loss of $113,156 for the six months ended September 30, 1999
compared to $632,906 of gross profit for the first six months in Fiscal 1999.
Research and development expenses for the first six months of Fiscal
2000 of $176,963 decreased from $412,516 for the same period in Fiscal 1999. The
decrease of $235,553 (57.1%) was due primarily to the decreases in the
engineering staff and related costs, and the reduced development costs of the
AOI-2500 systems.
Sales and marketing expenses decreased to $120,268 for the six months
ended September 30, 1999 from $517,363 for the first six months of Fiscal 1999.
The decrease of $397,049 (76.8%) was due primarily to decreased commissions on
the greatly reduced sales volume, decreases in staffing and related expenses and
reductions in promotional expenses.
General and administrative expenses decreased to $244,847 for the first
six months of Fiscal 2000 from $400,023 for the same period in Fiscal 1999. The
decrease of $155,176 (38.8%) was due primarily to decreases in staffing and
related expenses and professional and consultant fees.
Interest expense (net) was $65,246 for the six months ended September
30, 1999 compared to $73,341 for the same six month period in 1998. This was due
to the decreased use of factoring of accounts receivable during Fiscal 2000 as
compared to Fiscal 1999. Other income was $2,205 for the first six months of
Fiscal 2000 compared to $3,144 for Fiscal 1999, made up of favorable currency
translations.
Due to the uncertainty of realizing the tax benefits of net operating
loss carryforwards, no provision for income tax benefit was made for either of
the six-month periods ended September 30, 1999 or 1998.
Primarily as a result of the decreased revenues and the resulting gross
loss, offset by significantly decreased expenses, the net loss for the first six
months of Fiscal 2000 decreased to $718,275, as compared to the net loss of
$767,193 for the same period in Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred operating losses since inception that have
continued through September 30, 1999. In addition, the financial statements of
the Company for Fiscal 1999, Fiscal 1998 and the six month periods ended
September 30, 1999 and 1998 were prepared on the assumption that the Company
will continue as a going concern and do not include any adjustments that would
result if the Company would cease as a going concern. The report of the
independent accountants for the fiscal year ended March 31, 1998 contained an
explanatory paragraph as to the Company's ability to continue as a going
concern. Among the factors cited by the auditors as raising substantial doubt as
to the Company's ability to continue as a going concern is that the Company has
suffered recurring losses from operations, and had an accumulated deficit of
$10,399,723 as of March 31, 1998 which has increased to $13,146,424 as of
September 30, 1999. The auditors noted that the Company's capital requirements
might change depending upon numerous factors, including the demand for the
Company's product. In view of the Company's current financial condition, the
Company plans to continue to aggressively manage its working capital and
expenses while pursuing
19
<PAGE>
the sale of assets contemplated by the Transaction. In the event the Company is
unable to complete the Transaction, it may be required to take additional steps
which could include seeking protection under bankruptcy laws. (See Note B to the
Financial Statements)
The Company's operations to date have been funded by equity
investments, borrowing from banks, investors and stockholders, factoring of
accounts receivable, and to a limited extent, cash flow from operations. At
September 30, 1999, the Company had cash of $15,630, and deficit working capital
of $2,572,747. During Fiscal 1999 and Fiscal 1998, cash used in operating
activities was $610,027 and $2,474,234, respectively. Capital expenditures were
$463,800 during Fiscal 1999, primarily for demonstration equipment financed by
capitalized leases. Some of this demonstration equipment was sold during Fiscal
1999 and the capital lease paid off. The Company has no outstanding material
commitments for capital expenditures. During Fiscal 1998, the Company received
$3,086,749 from sales of Common Stock and warrant exercises. The Company raised
$2,734,590 (net of issuance costs of $265,410) of private equity from Imprimus
Investors LLC. In addition, an investor exercised a warrant and purchased
100,014 shares of Common Stock for $100,014. Warrantholders exercised warrants
and purchased 1,187,406 shares Common Stock at prices from $.25 to $.60 per
share. Cash was received for $252,145, and a note receivable was issued from an
officer of the Company in the amount of $125,000, and a noteholder canceled a
promissory note due to the Company as payment.
The Company derives most of its annual revenues from a relatively small
number of sales of products, systems and upgrades, with product prices ranging
from $200,000 to $500,000 per system. As a result, accounts receivable have
fluctuated based on the number of systems sold in each period and the timing of
the individual sales within each period. Moreover, any delay in the recognition
of revenue for single products or a delay in shipment to customers, systems or
upgrades would have a material adverse effect on the Company's results of
operations for a given accounting period. In addition, some of the Company's net
sales have been realized near the end of a quarter. Accordingly, a delay in a
customer's acceptance or in a shipment scheduled to occur near the end of a
particular quarter could materially adversely affect the Company's results of
operations for that quarter. The accounts receivable balance increased from
$214,450 at March 31, 1998, to $462,624 at March 31, 1999 and decreased to
$199,281 at September 30, 1999.
Fluctuations in inventory will be caused by changes in production
levels, timing of materials inflows, amount of sales and the timing of shipments
to customers. Inventory decreased to $885,955 at March 31, 1999 from $1,995,194
as of March 31, 1998. The decrease in inventory of $1,109,239 was primarily
caused by a decrease in finished goods and work-in-process as the Company
liquidated as much inventory as it could and the fact that it was experiencing
difficulties in obtaining materials due to its financial condition and the
reluctance of suppliers to provide materials on credit. Inventory declined
further to $846,659 at September 30, 1999.
Pursuant to the Agreement, as of November 1, 1999, the Company has
obtained debt financing from Focus AOI to fund its operations from November 1,
1999 through the closing of the Transaction. The Company's management believes
that the debt capital provided by Focus AOI will be sufficient to fund
continuing operations through the closing of the Transaction. There can be no
assurance that the Company can attract additional capital at favorable rates, if
at all.
20
<PAGE>
INFLATION
To date, inflation has not had a material effect on the Company's
business.
YEAR 2000 ISSUE DISCLOSURE
The Company has evaluated the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the inability
of computer software programs to properly recognize and process date sensitive
information relating to the Year 2000. It is not anticipated that the Company
will incur any negative significant impact as a result of this potential
problem. The Company's systems are currently Year 2000 compliant. Certain of the
Company's applications, which utilize a two-digit century field, have been
modified to be Year 2000 compliant.
SECURITIES OWNERSHIP
The following table sets forth, as of December 20, 1999, the ownership of the
Company's Common Stock by (i) each person who is known by the Company to own of
record or beneficially more than 5% of the Company's Common Stock; (ii) each of
the Company's directors; (iii) each executive officer named in the Summary
Compensation Table; and (iv) all directors and executive officers as a group.
Except as otherwise indicated, the stockholders listed in the table have sole
voting and investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Beneficial Common
Name and Address of Beneficial Owner (2) Ownership Stock(1)
- ---------------------------------------- ---------- ---------
<S> <C> <C>
Charles M. Leighton (3) 5,000,000 38.79%
Harry Hsuan Yeh, Ph.D. (4) 1,537,563 14.12%
Thomas L. DePetrillo 958,183 8.80%
Juan J. Amodei, Ph.D. (5) 915,714 8.26%
Massachusetts Technology Development Corporation (6) 929,749 8.35%
Polaroid Corporation (7) 777,228 7.01%
Massachusetts Community Development Finance Corporation (8) 677,931 6.13%
Charles Broming (8)(9) 677,931 6.13%
Joseph A. Teves (10) 265,896 2.44%
All Officers and Directors as a group (6 persons) 3,480,704 30.69%
(1)(2)(4)(8)(9)(10)(11)
- --------------
</TABLE>
21
<PAGE>
(1) The number of shares of Common Stock issued and outstanding on December
20, 1999, was 10,890,201. The calculation of percentage ownership for
each listed beneficial owner is based upon the number of shares of
Common Stock issued and outstanding at December 20, 1999, plus shares
of Common Stock subject to options held by such person at December 20,
1999 and exercisable within 60 days thereafter. The persons and
entities named in the table have sole voting and investment power with
respect to all shares shown as beneficially owned by them, except as
noted below.
(2) The address for Drs. Amodei and Yeh and Mr. Teves is c/o Industrial
Imaging Corporation, 847 Rogers Street, Lowell, Massachusetts 01852.
The address for Massachusetts Technology Development Corporation is 148
State Street, Boston, Massachusetts 02109. The address for Polaroid
Corporation is 549 Technology Square, Cambridge, Massachusetts 02139.
The address for Massachusetts Community Development Corporation is 10
Post Office Square, Suite 1090, Boston, Massachusetts 02109. The
address for Mr. Broming is c/o Kirby & Allen, Inc., 33 Maguire Street,
East Brunswick, New Jersey 08816. The address for Mr. Leighton is 51
Vaughn Hill Road, Bolton, Massachusetts 01740. The address for Mr.
DePetrillo is 65 Peaked Rock Road, Narragansett, Rhode Island 02904.
(3) Includes warrants to purchase 2,000,000 shares of Common Stock at
exercise prices ranging from $1.00 to $2.00 per share.
(4) Includes options to purchase 2,000 shares of Common Stock at $1.00 per
share. Excludes warrants to purchase 248,145 shares of Common Stock at
an exercise price of $1.00 per share and options to purchase 3,000
shares of Common Stock at an exercise price of $1.00 per share.
(5) Includes (i) warrants to purchase 98,729 shares of Common Stock with an
exercise price of $1.00 (ii) options to purchase 32,000 shares of
Common Stock at an exercise price of $.20 per share; and (iii) options
to purchase 60,000 shares of Common Stock at an exercise price of
$1.00. Excludes warrants to purchase 206,245 shares of Common Stock at
an exercise price of $1.00 per share, and options to purchase 30,000
shares of Common stock at $1.00 per share.
(6) Includes warrants to purchase 250,007 shares of Common Stock at an
exercise price of $1.00.
(7) Includes warrants to purchase 200,028 shares of Common Stock at an
exercise price of $1.00 per share. Excludes warrants to purchase
180,380 shares of Common Stock at an exercise price of $1.00 per share.
(8) Includes (i) warrants to purchase 149,910 shares of Common Stock with
exercise price of $1.00 per share (ii) warrants to purchase 20,000
shares of Common Stock with exercise price of $.20 per share and (iii)
options to purchase 2,000 shares of Common Stock at an exercise price
of $1.00 per share. Excludes warrants to purchase 32,040 shares of
Common Stock at an exercise price of $1.00 per share and options to
purchase 3,000 shares of Common Stock at an exercise price of $1.00 per
share.
22
<PAGE>
(9) Mr. Broming, a director of the Company, is the board representative for
the Massachusetts Community Development Finance Corporation. As such,
Mr. Broming retains voting control over the shares owned by the
Massachusetts Community Development Finance Corporation.
(10) Includes options to purchase 2,000 shares of Common Stock at an
exercise price of $1.00 per share and 25,003 shares of Common Stock
owned by Mr. Teves' adult son of which Mr. Teves is deemed to have
beneficial ownership. Excludes (i) warrants to purchase 28,470 shares
of Common Stock at an exercise price of $1.00 per share (ii) warrants
to purchase 14,675 shares of Common Stock at an exercise price of $1.00
per share (iii) 4,510 shares issuable upon exercise of outstanding
warrants granted to Mr. Teves' adult son, to purchase 4,510 shares of
Common Stock at an exercise price of $1.00 per share and (iv) and
options to purchase 3,000 shares of Common Stock at an exercise price
of $1.00 per share.
(11) Includes (i) options to purchase 12,400 shares of Common Stock at an
exercise price of $.20 per share and 19,200 shares issuable upon
exercise of the vested portion of options to purchase 34,000 shares of
Common Stock at an exercise price of $1.00 per share held by Michael
Chase, the Company's Vice President of Manufacturing and Field Service
and (ii) options to purchase 17,600 shares of Common Stock at an
exercise price of $.20 per share and 34,400 shares issuable upon
exercise of the vested portion of options to purchase 38,000 shares of
Common Stock at an exercise price of $1.00 per share held by Richard J.
Royston, the Company's Vice President of Research. Excludes unvested
options to purchase 30,000 and 3,000 shares of Common Stock at $0.375
held by Mr. Chase and Mr. Royston respectively.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the OTC Bulletin Board. Until
January 1997, the Company's Common Stock traded under the symbol ORBS. As part
of its acquisition of Triple I Corporation, the Company completed an 18:1
reverse stock split and changed its trading symbol to INIM.
As of December 20, 1999, the Company had 275 holders of record of its
Common Stock. Management believes that there are approximately 550 beneficial
owners of the Company's Common Stock.
For the fiscal quarters reported below, the following table sets forth
the range of high and low bid quotations for the Common Stock for the relevant
periods as reported by the OTC Bulletin Board. The high and low bid price on
October 29, 1999 was $.125 and $.125, respectively. Such quotations represent
inter-dealer quotations without adjustment for retail markups, markdowns or
commissions and may not represent actual transactions. The quotations have been
adjusted to reflect the 18:1 reverse stock split. The quotations represent
interdealer quotations, do not include retail mark-ups or commissions and do not
necessarily represent actual transactions.
23
<PAGE>
HIGH BID LOW BID
COMMON STOCK
Fiscal Year 1998
First Quarter......................................... $3 1/4 $1 1/8
Second Quarter........................................ $1 3/8 $1 1/8
Third Quarter......................................... $1 1/8 $ 7/8
Fourth Quarter........................................ $1 $ 7/8
Fiscal Year 1999
First Quarter......................................... $1 3/16 $11/16
Second Quarter........................................ $ 7 /8 $ 1/2
Third Quarter......................................... $ 5/8 $ 3/8
Fourth Quarter ....................................... $ 5/8 $ 3/8
Fiscal Year 2000
First Quarter......................................... $ 5/8 $ 1/4
Second Quarter........................................ $ 5/16 $ 1/8
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since
inception and does not anticipate the payment of cash dividends on its Common
Stock in the foreseeable future. There are no restrictions that limit the
Company's ability to pay dividends on the Common Stock.
FOCUS CANADA INFORMATION
Focus Canada was incorporated in 1987 and its corporate headquarters
and manufacturing facilities are located at 101 Randall Drive, Waterloo,
Ontario, Canada N2V 1Z5 (website: WWW.FOCUSAUTOMATION.COM). Focus Canada is a
leading developer, manufacturer, and worldwide marketer of automated surface
inspection products and yield management solutions in major market segments of
the electronics, printing and web manufacturing industries. Focus Canada's
WebScan family of products is used by manufacturers to reduce scrap, improve
productivity, improve quality and ultimately increase profits. Focus Canada's
WebScan products are currently used by a number of Fortune 500 customers
including Xerox, 3M, DuPont, Toshiba, Hewlett-Packard, Kodak, and others.
Focus Canada was formed in 1987 by former employees of Automation
Tooling Systems Inc. (ATS). The founders of Focus Canada identified the need for
high speed, high accuracy surface inspection equipment and worked to develop
CyberScan, Focus Canada's continuous vision processor and core technology.
CyberScan is a unique enabling technology that combines parallel pipeline
processing with robust, industry proven software algorithms. In 1994, Focus
Canada released its initial versions of the WebScan family of automated surface
inspection systems utilizing the patented CyberScan vision processor.
24
<PAGE>
Focus Canada's WebScan products combine high-resolution optical
inspection with sophisticated, patented software algorithms to provide quality
control for high-speed line production.
Focus Canada sells and distributes its products through a direct sales
force for the North American market and Focus Europe, SA its European sales and
service office in Belgium. These sales efforts are augmented by important
original equipment manufacturer ("OEM"), distribution, and reseller
relationships in Asia and Europe. These OEMs, distributors and resellers include
Itochu Corp. (Asian distributor), Toshiba Inc. (Asian OEM), Toshiba
International Inc. (North American reseller), VEGA (European reseller), and V
Technology Co. Ltd.
(Asian OEM).
Focus Canada's WebScan products, depending on the application, are sold
at prices that range from USD$90,000 to $350,000. As of August 31, 1999 Focus
Canada's contractual order backlog was approximately CDN$8.2 Million.
MARKETS
a. Electronics AOI Market
The electronics automated optical inspection ("AOI") market segments
which Focus Canada believes have the greatest need for its continuous high
performance technology are in the inspection of Plasma Display Panels ("PDP"),
Flexible Printed Circuits, and IC packaging products and processes such as Lead
Frame assemblies, Ball Grid Array ("BGA"), and Tape-Automated Bonding ("TAB").
PLASMA DISPLAY INSPECTION. In the Plasma Display Panel market, Focus
Canada estimates that through its OEM partner, V Technology Co. Ltd. ("V Tech"),
Focus Canada has captured an 80% market share in supplying AOI systems to
manufacturers of PDP products. By inspecting the plasma display panels after
each critical process step, Focus Canada's technology enables early detection,
analysis, and elimination of process-induced defects. Plasma displays are being
pioneered by a number of primarily Japanese corporations including Fujitsu, NEC,
Matsushita, Mitsubishi and Pioneer. These companies and others compete in the
display market, which is estimated by Focus Canada to exceed USD$30 Billion
worldwide per year. Focus Canada currently estimates that the market for PDP AOI
machines is projected to grow to USD$80 Million by 2005.
Focus Canada also markets its automated optical inspection products to
manufacturers of flexible circuits, lead frame, and other high-value IC
packaging products. These opportunities require very high performance AOI
solutions capable of high-resolution inspection.
b. High-Value Print Inspection Market
Focus Canada's family of WebScan products are used for the high-speed,
high-resolution inspection of pharmaceutical labels, plastic cards and high
valued-added packaging. Focus Canada believes that it is unique in offering
print inspection solutions that can inspect 100% of the printed product at full
production speeds.
CARDSCAN is Focus Canada's leading solution for the inspection of
printed plastic/security cards. CardScan detects the smallest defects while
scanning 100% of every card at full production
25
<PAGE>
speeds. At inspection speeds of up to 30,000 cards per hour CardScan increases
overall productivity and helps reduce the cost of rejects.
PHARMAVISION Focus Canada markets and sells PharmaVision print
inspection solutions to printers of pharmaceutical labels to allow for the 100%
inspection of their product. PharmaVision ensures quality for this high-security
product and improves productivity.
ON-PRESS PRINT INSPECTION Focus Canada has applied the quality and
cost-reduction advantages of PharmaVision to a wide range of high-value print
applications. On-press print inspection provides 100% inspection and defect
detection for high quality labels, medical information packets and health and
beauty packaging.
UNPATTERNED WEB INSPECTION
Focus Canada also applies its core CyberScan technology to the
inspection of roll-to-roll products manufactured in a continuous process such as
paper, film and foil.
WEBSCAN M71NX In partnership with Toshiba Engineering Japan Focus
Canada has developed WebScan M71NX, a product solution that is designed to
provide 100% defect detection, classification and visualization with what Focus
Canada believes is unsurpassed performance at scalable price points starting at
USD$100,000.
FINANCIAL PERFORMANCE
For its fiscal year ended November 30, 1998 Focus Canada's revenue was
CDN$7.0 Million representing an increase of 63% over fiscal 1997 revenue. Focus
Canada's net loss for fiscal 1998 was CDN$540,000 and was driven by Focus
Canada's expansion of its marketing and sales activities as well as expending
more than CDN$1.6 Million on research and development activities. For the nine
month period ended August 31, 1999, based on the unaudited financial statements
of Focus Canada, Focus Canada's revenue for the period was approximately CDN$7.0
Million compared to CDN$4.2 Million for the corresponding period ending August
31, 1998. Gross Profit for the nine month period ended August 31, 1999 was
CDN$2.8 Million compared to CDN$1.9 Million for the corresponding period and
Operating Profit/(Loss) before income taxes was CDN$(1.7) Million compared to
CDN$(1.0) Million for the earlier period. The increase in operating loss is
attributable to increased investment by Focus Canada in research and development
and continued expansion of distribution channels. The following table summarizes
some of Focus Canada's financial results for the nine month period ended August
31, 1999, compared to the corresponding period ending August 31, 1998:
Nine Months ended Nine Months ended
August 31, 1999 August 31, 1998
(unaudited) (000s) (unaudited) (000s)
Gross Profit CDN$ 2,802 CDN$ 1,935
Operating Profit/(Loss) before income CDN$ (1,735) CDN$ (962)
taxes
Total Current Assets CDN$ 10,190 CDN$ 8,499
26
<PAGE>
As of October 30, 1999 Focus Canada's current assets exceeded its
current liabilities by approximately CDN$11.5 Million and Focus Canada had
long-term debt of approximately CDN$2.0 Million.
OWNERSHIP
Focus Canada is a private corporation currently owned by its founders
and employees together with four Canadian-based venture capital
funds/corporations and two Taiwanese venture capital corporations.
THIS IS AN INFORMATION STATEMENT AND INDUSTRIAL IMAGING IS
NOT SOLICITING PROXIES. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
27
<PAGE>
EXHIBIT A
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made as of November 1, 1999,
BETWEEN
FOCUS AOI, INC., a corporation incorporated under the laws of the
State of Delaware
(the "PURCHASER")
- and -
AOI INTERNATIONAL, INC., a corporation incorporated under the laws
of the State of Delaware
("AOI")
- and -
INDUSTRIAL IMAGING CORPORATION, a corporation existing under the
laws of the State of Delaware
("INDUSTRIAL")
WHEREAS:
A. Industrial and its wholly-owned subsidiary, AOI (collectively,
the "VENDORS" or the "COMPANIES" and, individually a "VENDOR")
are engaged in the business (the "BUSINESS") of developing,
manufacturing and distributing the Products for the automated
optical inspection of printed circuit boards and for other
purposes; and
B. The Purchaser desires to purchase from the Vendors, and the
Vendors desire to sell to the Purchaser, certain of the
operating assets of the Business, upon the terms and
conditions set forth in this Agreement.
NOW THEREFORE in consideration of the foregoing, the covenants
and agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1 - DEFINITIONS AND PRINCIPLES OF INTERPRETATION
1.1 DEFINITIONS. For purposes of this Agreement, the following terms and
phrases shall have the following meanings:
(a) "AFFILIATE" means, with respect to any Person, any (a) director,
officer, manager or general partner of such Person, (b) a spouse,
parent, grandparent, sibling or descendant of such Person and (c)
any other Person that, directly or indirectly through one or more
intermediaries, controls, is controlled by or is under common
control with such Person. The term "control" includes, without
limitation, the possession, directly or indirectly, of the power to
direct the management and
<PAGE>
policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "ANCILLARY DOCUMENTS" has the meaning ascribed thereto in Section
4.1(b).
(c) "ASSET ADVANCES" means the aggregate of all amounts advanced by
Focus or the Purchaser to or for the benefit of the Vendors pursuant
to the provisions of Section 5.10 which are used in whole or in part
to purchase any Inventory or Fixed Assets prior to Closing.
(c) "ASSIGNED CONTRACTS" has the meaning ascribed thereto on Section
2.1(h).
(d) "BUSINESS DAY" means any day other than a Saturday, a Sunday or a
legal holiday on which banks are authorized or required to be closed
for the conduct of commercial banking business in Massachusetts or
Ontario.
(e) "CLAIM NOTICE" has the meaning ascribed thereto in Section 11.3.
(f) "CLOSING" has the meaning ascribed thereto in Section 7.1.
(g) "CLOSING DATE" has the meaning ascribed thereto in Section 7.1.
(h) "COMMITMENTS" has the meaning ascribed thereto in Section 2.1(g).
(i) "CONTRACTS" has the meaning ascribed thereto in Section 2.1(h).
(j) "EARNOUT AMOUNT" has the meaning ascribed thereto in Section 3.1.
(k) "EARNOUT PAYMENT" has the meaning ascribed thereto in Section 11.5.
(l) "EARNOUT SECURITY AGREEMENT" means the security agreement executed
by the Purchaser in favour of the Vendor in the form attached hereto
as SCHEDULE 1.1(l).
(m) "EMPLOYMENT AGREEMENTS" has the meaning ascribed thereto in Section
5.6.
(n) "FINANCIAL STATEMENTS" has the meaning ascribed thereto in Section
4.1(e).
(o) "FIXED ASSETS" has the meaning ascribed thereto in Section 2.1(d).
(p) "FOCUS" means Focus Automation Systems Inc.
(q) "GAAP" has the meaning ascribed thereto in Section 4.1(e).
(r) "GOODWILL" has the meaning ascribed thereto in Section 2.1(j).
(s) "GOVERNMENTAL AUTHORITY" means any court, arbitrator, administrative
agency or commission, or governmental or regulatory official,
department, agency, body, authority or instrumentality, whether
Canadian, United States, or of any other foreign country, and
whether federal, provincial, state or local.
2
<PAGE>
(t) "INDEMNIFIED PARTY" has the meaning ascribed thereto in Section
11.3.
(u) "INDEMNIFYING PARTY" has the meaning ascribed thereto in Section
11.3.
(v) "INDUSTRY CERTIFICATIONS" has the meaning ascribed thereto in
Section 4.1(u).
(w) "INITIAL PAYMENT" has the meaning ascribed thereto in Section 3.1.
(x) "INVESTOR NOTES" has the meaning ascribed thereto in Section 5.9.
(y) "INVESTORS" has the meaning ascribed thereto in Section 5.9.
(z) "INVENTORY" has the meaning ascribed thereto in Section 2.1(a).
(aa) "ISSUE PRICE" has the meaning ascribed thereto in Section 6.1(d).
(bb)"KNOWLEDGE OF COMPANIES" or "COMPANIES' KNOWLEDGE" means the actual
knowledge of any director, officer or management level employee of
the Companies or John Freeman after reasonable enquiry within
Companies.
(cc)"LAWS" means any federal, provincial, state, local, municipal or
foreign statute, law, ordinance, regulation, rule, code, order, or
other requirement or rule of law.
(dd)"LETTER OF CREDIT" has the meaning ascribed thereto in Section
6.2(i)(i).
(ee)"LIABILITY" means any liability or obligation, whether known or
unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become
due, regardless of when asserted.
(ff)"LIABILITY ADVANCES" means the aggregate of all amounts advanced by
Focus or the Purchaser to or for the benefit of the Vendors pursuant
to the provisions of Section 5.10 which are used to satisfy in whole
or in part any Liability of the Vendors existing at the date hereof
including, without limitation, (i) the amount of U.S. $135,000 paid
to Barry Levine on or about the date of execution of this Agreement;
and (ii) U.S. $75,170.10 in respect of employee medical insurance
premiums.
(gg)"LIEN" means any lien, claim, hypothecation, assignment,
preference, priority, option, pledge, charge, security interest,
mortgage, equitable interest, or other encumbrance of any nature or
kind whatsoever.
(hh)"LOSSES" has the meaning ascribed thereto in Section 11.1.
(ii)"MATERIAL AGREEMENTS" has the meaning ascribed thereto in Section
4.1(m).
(jj)"NOTICE PERIOD" has the meaning ascribed thereto in Section 11.3.
(kk)"ORGANIZATIONAL DOCUMENTS" means the charter and by-laws of a
corporation, including any amendments thereto or restatements
thereof.
3
<PAGE>
(ll)"PERSON" means any individual, sole proprietorship, general
partnership, limited partnership, joint venture, trust,
unincorporated organization, association, corporation, limited
liability company, Governmental Authority or other entity.
(mm)"PRODUCTS" means printed circuit board inspection products, dry
film photograph plotters and all associated spare parts developed,
manufactured and distributed by the Vendors and all service revenue
derived by the Vendors therefrom.
(nn)"PROPRIETARY RIGHTS" has the meaning ascribed thereto in Section
4.1(l)(i).
(oo)"PURCHASE PRICE" has the meaning ascribed thereto in Section 3.1.
(pp)"PURCHASED ASSETS" has the meaning ascribed thereto in Section 2.1.
(qq)"PURCHASER NOTE" has the meaning ascribed thereto in Section 5.10.
(rr)"PURCHASER SECURITY AGREEMENT" has the meaning ascribed thereto in
Section 5.10.
(ss)"RECEIVABLES" has the meaning ascribed thereto in Section 2.1(b).
(tt)"RELATED PARTY" has the meaning ascribed thereto in Section 4.1(r).
(uu)"TAX" OR "TAXES" means any and all taxes, fees, levies, duties,
tariffs, imposts, and other charges of any kind (together with any
and all interest, penalties, fines, additions to tax and additional
amounts imposed with respect thereto) imposed by any Governmental
Authority or other taxing authority, including, without limitation:
taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, goods and services tax
(GST), land transfer tax, property, sales, provincial sales tax,
use, capital stock, payroll, employment, social security, workers'
compensation, unemployment insurance or compensation, or net worth;
taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value added, or gains taxes; license,
registration and documentation fees; and customs duties, tariffs,
and similar charges that are or have been (a) imposed, assessed or
collected by or under authority of any Governmental Authority, or
(b) payable pursuant to any tax sharing agreement or similar
contract and all unemployment insurance, health insurance and
Canadian, Ontario and other government pension plan premiums.
(vv)"TAX RETURNS" has the meaning ascribed thereto in Section 4.1(t).
(ww)"UNRESOLVED CLAIM" has the meaning ascribed thereto in Section
11.5.
(xx)"WORKING CAPITAL ADVANCES" means the aggregate of: (i) the
aggregate of all amounts advanced or expended by Focus or the
Purchaser to or for the benefit of the Vendors pursuant to the
provisions of Section 5.10 other than Liability Advances and Asset
Advances; (ii) all amounts expended by Focus or the Purchaser (or
advanced by Focus or the Purchaser to the Vendors) with respect to
expenses for the EPC Tradeshow including, without limitation,
registration, travel and freight, being approximately Cdn. $80,000;
(iii) U.S. $45,000 with
4
<PAGE>
respect to legal fees and disbursements for the Vendors; (iv) U.S.
$26,100 with respect to insurance premiums; (v) U.S. $45,704 with
respect to premises rent; and (vi) compensation for a
Vice-President, Sales responsible for the Business.
(yy)"YEH/AMODEI SECURITY AGREEMENT" has the meaning ascribed thereto in
Section 5.9.
1.2 HEADINGS, SECTIONS. The headings preceding the text of Articles and
Sections included in this Agreement and the headings to Exhibits and
Schedules attached to this Agreement are for convenience only and shall
not be deemed part of this Agreement or be given any effect in
interpreting this Agreement. The use of the masculine, feminine or
neuter gender herein shall not limit any provision of this Agreement.
The use of the term "INCLUDE" shall in all cases mean "INCLUDE, WITHOUT
LIMITATION,". Any due diligence review, audit or other investigation or
inquiry undertaken or performed by or on behalf of a party shall not
limit, qualify, modify or amend the representations, warranties or
covenants of, or indemnities made by, any other party pursuant to this
Agreement, irrespective of the knowledge and information received (or
which should have been received) therefrom by the investigating party,
and consummation of the transactions contemplated herein by a party
shall not be deemed a waiver of a breach of or inaccuracy in any
representation, warranty or covenant or of any party's rights and
remedies with regard thereto.
1.3 SCHEDULES. The following are the Schedules attached to and incorporated
in this Agreement by reference and are deemed to be an integral part
hereof:
Schedule 1.1(l) Earnout Security Agreement
Schedule 2.1(a) Inventory
Schedule 2.1(b) Receivables
Schedule 2.1(c) Prepaid Expenses
Schedule 2.1(d) Fixed Assets
Schedule 3.1 Calculation of Earnout Amount
Schedule 4.1(l)(ii) Proprietary Rights
Schedule 4.1(m) Agreements
Schedule 4.1(o) Licenses, Permits and Authorizations
Schedule 4.1(p) Companies' Warranties
Schedule 4.1(r) Related Parties
Schedule 4.1(s) Companies' Insurance Policies
Schedule 4.1(t) Taxes
Schedule 4.1(u) Industry Certifications
Schedule 5.6 List of Key Employees
Schedule 5.9 Investor Notes, Yeh/Amodei Security
Agreement and First Intercreditor Agreement
Schedule 5.10 Purchaser Note, Purchaser Security Agreement
and Collateral Assignment of Patents
Schedule 5.11 Second Intercreditor Agreement
Schedule 6.1(d) Form of Warrants
Schedule 7.2(e) Opinion of Counsel to the Companies
Schedule 7.3(d) Opinion of Counsel to the Purchaser
ARTICLE 2 - PURCHASE AND SALE
5
<PAGE>
2.1 AGREEMENT OF PURCHASE AND SALE. Subject to the terms and conditions
hereof, at the Closing, the Vendors shall sell, assign, convey,
transfer and deliver to the Purchaser and the Purchaser shall purchase
from the Vendors all right, title and interest of the Vendors in and to
the following assets (the "PURCHASED ASSETS"):
(a) all of the packaging, supplies, raw materials, work in
progress, finished goods inventories, components and repair
and replacement parts used in the Business as at Closing as
listed on SCHEDULE 2.1(a) (the "INVENTORY");
(b) all notes and accounts receivable and other receivables of any
kind relating to the Business as at Closing as listed on
SCHEDULE 2.1(b) (the "RECEIVABLES");
(c) all prepaid expenses and deposits relating to the Business as
at Closing, including, without limitation, all prepaid taxes
and water rates, all prepaid purchases of gas, oil and hydro,
and all prepaid lease payments as at Closing as listed on
SCHEDULE 2.1(c) (the "PREPAID EXPENSES");
(d) all of the fixed assets, machinery, manufacturing equipment,
laboratory and testing equipment, demonstration instruments
and equipment, office equipment, furniture and motor vehicles
used in the Business, as at Closing as listed on SCHEDULE
2.1(d) but, for greater certainty, excluding all equipment
used by the Vendors pursuant to capital leases (the "FIXED
ASSETS");
(e) all Proprietary Rights, as defined in Section 4.1, owned or
licensed in connection with the Business to the extent
transferable by the Companies;
(f) all of the books and records directly related to the Products,
the Business and the Purchased Assets, including, but not
limited to, customer and supplier lists and records, account
histories, sales and pricing information, records relating to
marketing programs and training programs, and manufacturing
and quality control records ("BOOKS AND RECORDS");
(g) the purchase and sales orders and commitments issued to and
the purchase and sales orders and commitments (or the portions
thereof) issued by either Vendor related to the Products, the
Purchased Assets, or the Business which the Purchaser, in its
sole discretion, assumes on Closing (the "COMMITMENTS");
(h) the leases, capital leases, contracts, agreements and
commitments related to the Products, the Purchased Assets or
the Business to the extent transferable, which the Purchaser,
in its sole discretion, assumes on Closing (the "CONTRACTS"
and, together with the Commitments, the "ASSIGNED CONTRACTS");
(i) all of the sales literature, brochures, training manuals and
related materials and advertising and promotional materials
that are related to the Products, the Purchased Assets and the
Business ("SALES MATERIALS");
(j) all goodwill of the Companies and information and documents
relevant thereto, including, without limitation, lists of
customers and suppliers, phone numbers, web sites, e-mail
addresses, credit information, research materials and
6
<PAGE>
development files ("GOODWILL");
(k) all registrations, permits, licenses, or approvals of any
nature, or grandfathered practices or other authorizations
related to the Products, the Purchased Assets or the Business
to the extent transferable of which the Purchaser, in its sole
discretion, requests transfer ("LICENCES");
(l) The listings of Inventory, Receivables, Prepaid Expenses and
Fixed Assets on SCHEDULES 2.1(a), (b), (c) and (d),
respectively, are current as of the dates specified thereon.
Ten Business Days prior to Closing, lists of Inventory,
Receivables, Prepaid Expenses and Fixed Assets as of such date
shall be delivered to the Purchaser. On Closing, lists of
Inventory, Receivables, Prepaid Expenses and Fixed Assets as
of the Closing Date shall be attached hereto, as SCHEDULES
2.1(a), (b), (c) and (d), respectively, and shall include,
without limitation, all Inventory and Fixed Assets purchased
by the Vendors with the Asset Advances and all of the
provisions of this Agreement shall apply thereto.
2.2 TRANSFER OF TITLE TO THE PURCHASED ASSETS. The sale and delivery by the
Vendors of the Purchased Assets shall be made at the Closing, upon
payment of the Initial Payment by the Purchaser, by such bills of sale,
assignments, licenses, endorsements and other appropriate instruments of
transfer as shall be necessary to vest in the Purchaser, as of the
Closing Date, all right, title and interest of the Vendors in and to the
Purchased Assets, free and clear of all Liens.
2.3 TRANSFER OF CONTRACTS. Nothing in this Agreement shall be construed as
an attempt to assign any Purchased Asset which is by its terms or by Law
nonassignable without the consent of the other party or parties thereto,
unless such consent shall have been given or as to which all the
remedies for the enforcement thereof enjoyed by the Vendors would, as a
matter of Law, pass to the Purchaser as an incident of the assignments
provided for by this Agreement. In the event (a) any Purchased Asset
either does not permit or expressly prohibits the assignment by the
Vendors of their rights and obligations thereunder, (b) the Vendors have
not obtained the necessary written consents to an assignment from all
parties to any Purchased Asset prior to the Closing, or (c) direct
assumption of any Purchased Asset is not practical, the Purchaser shall
hold the Vendors harmless with respect to all obligations of the Vendors
payable and performable after the Closing Date in connection with such
Purchased Asset and the Vendors shall hold the benefits and privileges
of such Purchased Asset arising after the Closing Date in trust for the
Purchaser and cooperate with the Purchaser in any reasonable arrangement
designed to provide for the Purchaser the benefits with respect to such
Purchased Asset. Such arrangements shall include, but not be limited to,
the appointment of the Purchaser as attorney in fact for the Vendors.
2.4 COMPANIES' LIABILITIES. The Companies shall retain and remain
responsible for all of the Companies' Liabilities, including:
(a) all Liabilities of the Companies for borrowed money;
(b) all Tax Liabilities of the Companies (including claims not yet
filed);
(c) all general liability claims, including, without limitation,
product liability, personal
7
<PAGE>
injury or property damage claims in respect of pre-Closing
acts or omissions of the Companies or any predecessor or
Affiliate of the Companies;
(d) all Liabilities relating to any litigation involving the
Companies;
(e) all environmental Liabilities of the Companies;
(f) all labour relations, employee related and employee benefit
Liabilities of the Companies;
(g) all accounts payable and accrued expenses of the Companies
related to the Products, the Purchased Assets or the Business
and which arise or relate to the period prior to the Closing
Date;
(h) all Liabilities associated with Products sold prior to the
Closing Date, including, without limitation, and except as
provided in Section 5.8, all warranty repair or replacement
obligations of the Companies with respect to such Products;
(i) any Liabilities resulting from the operation of the Business
by the Companies on or prior to the Closing Date; and
(j) any suits, actions or claims which arise or relate to the
period prior to the Closing Date alleging infringement by the
Companies of Proprietary Rights held by others.
ARTICLE 3 - PURCHASE PRICE
3.1 PURCHASE PRICE. The aggregate purchase price for the Purchased Assets
shall be equal to the aggregate of US$1,000,000 (less the amount of
Liability Advances as at Closing together with interest thereon to
Closing as provided in the Purchaser Note) (the "INITIAL PAYMENT") and
the earnout amount (the "EARNOUT AMOUNT"), calculated and paid pursuant
to SCHEDULE 3.1 hereof (collectively, the "PURCHASE PRICE").
3.2 PAYMENT OF THE PURCHASE PRICE AND SECURITY. At the Closing, the
Purchaser shall pay to the Vendors the Initial Payment (allocated
between the Vendors as specified by them in writing). The Earnout
Amount shall be paid in accordance with the terms of SCHEDULE 3.1
hereof (allocated between the Vendors as specified by them in writing).
As security for the Earnout Amount, the Purchaser at Closing shall
deliver to the Vendors the Earnout Security Agreement. The Vendors
hereby acknowledge that Focus is not providing any guarantee or
security with respect to the Purchase Price.
3.3 ALLOCATION OF PURCHASE PRICE. The Purchaser shall allocate the Purchase
Price among the Purchased Assets covered by this Agreement as follows:
Inventory the lesser of fair market value and cost of
the Inventory, as agreed between the
Companies and the Purchaser prior to Closing
Receivables the net book value of Receivables less any
allowance therefor as determined in
accordance with GAAP
8
<PAGE>
Prepaid Expenses the face amount of the Prepaid Expenses
Fixed Assets the lesser of fair market value and net book
value of the Fixed Assets, as agreed between
the Companies and the Purchaser prior to
Closing
Proprietary Rights $1
Books and Records $1
Commitments $1
Contracts $1
Sales Materials $1
Goodwill $1
Licences $1
To the extent the aggregate of the amounts calculated pursuant to this
Section 3.3 is in excess of $1,000,000, the Parties agree that the
portion of the Purchase Price allocated to Fixed Assets shall be
reduced by the amount of such excess.
To the extent that the aggregate of the amounts calculated pursuant to
Section 3.3 is less than $1,000,000 and the Purchaser waives the
conditions contained in subsection 6.2(k), the Parties agree that the
portion of the Purchase Price allocated to Goodwill shall be increased
by such shortfall.
The Purchaser acknowledges that the amount of the Initial Payment shall
not be affected by the allocation determined pursuant to subsections
3.3 and 3.4.
3.4 DETERMINATION OF ALLOCATION. The listings of Inventory, Receivables and
Fixed Assets to be attached hereto pursuant to section 2.1 hereof as
SCHEDULES 2.1(a), (b) and (d), respectively, shall specify, on an
item-by-item basis, the amount to be allocated thereto, calculated as
specified in Section 3.3.
If the Purchaser disagrees with such allocations, within 30 days of the
Closing, such dispute shall be submitted for determination to an
independent firm of chartered accountants, mutually agreed to by the
Vendors and Purchaser, failing such agreement, to Ernst & Young LLP.
Such determination shall be final and binding on the Parties. Each of
the Vendor and Purchaser shall bear the costs of its respective
accountants and other advisors and the costs of the independent firm of
chartered accountants shall be borne equally between the Vendors and
the Purchaser.
3.5 FILINGS. Each party shall file in mutually agreeable form all returns
and elections required or desirable under the Internal Revenue Code of
1986, as amended (the "CODE") in a manner consistent with foregoing
allocation of the Purchase Price.
3.6 IRREVOCABLE DIRECTION. The Vendors hereby irrevocably direct the
Purchaser to pay, out of
9
<PAGE>
the Earnout Amount, pursuant to and in accordance with SCHEDULE 3.1 at
the time the Earnout Amount shall become payable, the amounts to Mr.
Charles M. Leighton and the amounts to Mr. Gene Weiner specified in
SCHEDULE 3.1 and to pay the remainder of the Earnout Amount, if any, to
the Vendors (allocated between the Vendors as specified by them in
writing).
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANIES. The Vendors
hereby jointly and severally represent and warrant to the Purchaser, as
of the date hereof (except as set forth below) and as of the Closing
Date, and acknowledges that the Purchaser is relying on same for
purposes of completing this transaction, as follows:
(a) ORGANIZATION, STANDING AND QUALIFICATION. Each of the Vendors
shall be, at Closing, a corporation duly incorporated, validly
existing and in good standing under the Laws of the State of
Delaware. Each of the Vendors shall, at Closing (i) have full
right, power and authority to carry on the Business as now being
conducted and to own or lease and operate its properties as and
in the places where the Business is now conducted, and (ii) be
duly qualified, licensed and authorized to do business and in
good standing in each jurisdiction where the nature of the
activities conducted by it or the character of the properties
owned, leased or operated by it in connection with the Business
require such qualification, licensing or authorization.
(b) AUTHORITY. Each of the Vendors has full corporate power and
authority to enter into and deliver this Agreement and each of
the other agreements, certificates, instruments and documents
contemplated hereby (collectively, the "ANCILLARY DOCUMENTS") to
which either Vendor is a party, and to carry out the transactions
contemplated hereby and thereby. Each of the Vendors has properly
taken or shall have properly taken by the Closing Date all
corporate action required to be taken by it with respect to the
execution and delivery of this Agreement and each of the
Ancillary Documents to which it is a party, and the consummation
of the transactions contemplated hereby and thereby.
(c) EXECUTION AND DELIVERY. This Agreement and each Ancillary
Document to which either of the Vendors is a party has been duly
authorized, executed and delivered by either Vendor and
constitutes a legal, valid and binding obligation of the Vendors,
enforceable against such Vendor in accordance with its respective
terms and conditions, except as enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereinafter in effect
affecting creditors' rights generally or by general principles of
equity.
(d) NO CONFLICTS. The execution, delivery and performance by the
Companies of this Agreement and each of the Ancillary Documents
to which either Vendor is a party, and the consummation of the
transactions contemplated hereby and thereby, do not and will not
violate, conflict with or result in the breach of any material
term, condition or provision of, or, to the best of the
Companies' Knowledge, require the consent of any Person under, or
give rise to the right to accelerate or terminate, or result in
the creation or right to create any Lien upon
10
<PAGE>
the Purchased Assets under, (i) any Law to which either Vendor or
any of its assets or properties is subject, (ii) any judgment,
order, writ, injunction, decree or award of any Governmental
Authority to which either Vendor is subject, (iii) any of the
Companies' Organizational Documents or (iv) any license,
agreement, commitment or other instrument or document to which
either Vendor is a party or by which either Vendor or any of its
assets or properties is otherwise bound. To the best of the
Companies' Knowledge, no authorization, approval or consent of,
release from, and no registration or filing with, any
Governmental Authority or any other Person is required in
connection with the execution, delivery or performance of this
Agreement or any Ancillary Document by the Vendor or Industrial.
(e) FINANCIAL STATEMENTS. The Companies have previously delivered to
the Purchaser true and correct copies of: (i) the audited
financial statements for the years ended March 31, 1998, 1997 and
1996; and (ii) the unaudited financial statements of the
Companies to March 31, 1999 (collectively, the "FINANCIAL
STATEMENTS"). The Financial Statements have been prepared from
and are consistent with the books, records and accounts of the
Companies, have been prepared in accordance with generally
accepted accounting principles used in the United States
("GAAP"), consistently applied throughout the periods indicated
(subject, in the case of the interim financial statements, to
normal year-end adjustments and information which would normally
be contained in footnotes to financial statements) and fairly
present, as of the dates and for the periods referred to therein,
the Companies' consolidated financial position and results of
operations. The books and records of the Companies accurately
record all material transactions during the periods covered by
the annual Financial Statements, the interim financial statements
and since March 31, 1998.
(f) ABSENCE OF UNDISCLOSED LIABILITIES. Since March 31, 1999, the
Companies have not incurred any Liabilities except in the
ordinary course of business.
(g) ABSENCE OF CHANGES. Since March 31, 1999, the Companies have
carried on the Business in the ordinary course in substantially
the same manner as heretofore conducted and have: (i) not sold or
disposed of any of the Purchased Assets, except sales or
dispositions of Inventory in the ordinary course of business;
(ii) preserved and maintained the Proprietary Rights and other
intangible assets related to the Business; (iii) performed in all
material respects all of the Companies' obligations under the
Material Agreements as defined in this Section 4.1; and (iv)
performed all obligations with respect to all employees of the
Vendor. Since March 31, 1999, there has not been any damage,
destruction or other casualty loss to or forfeiture of any of the
Purchased Assets (whether or not covered by insurance) which
would be material to the Business taken as a whole.
(h) TITLE TO ASSETS. At Closing, the Purchased Assets shall be free
and clear of all Liens other than the Liens to be created by the
Purchaser Security Agreement. The Purchased Assets constitute
substantially all the assets used in or necessary to the conduct
of the Business as presently conducted.
(i) RECEIVABLES. All of the Receivables of the Business, including
those arising since March 31, 1999, with respect to the Business,
to the best of the Companies'
11
<PAGE>
Knowledge, are bona fide, are not subject to any rights of
set-off and have arisen or were acquired in the ordinary course
of business and in a manner consistent with the regular credit
practices of the Business; (ii) the provisions for doubtful
accounts reserved on the books of the Business since March 31,
1999, have been determined in good faith and in accordance with
GAAP; and (iii) since March 31, 1999, the Companies have not
canceled, reduced, discounted, credited or rebated or agreed to
cancel, reduce, discount, credit or rebate, in whole or in part,
any Receivables except in the ordinary course of business.
SCHEDULE 2.1(b) is a complete list of all Receivables as at the
date thereof.
(j) INVENTORY. (i) The Inventory was acquired in the ordinary course
of business and in a manner consistent with the regular inventory
practices of the Business; (ii) the Inventory consists solely of
quantities and qualities usable, salable and merchantable by the
Business in the ordinary course of business, free from material
defect, and is maintained at normal levels consistent with
business needs; (iii) the Companies have not received any notice,
and have no reason to believe, that any customer could claim any
right to return any material amount of the Products sold by
either Company for credit or refund pursuant to any agreement,
understanding or practice; (iv) no Inventory is now stored with a
bailee, warehouseman or similar party; and (v) except as
specified on SCHEDULE 2.1(a), no Inventory is held by the
Business on consignment from other Persons or is held by other
Persons on consignment from the Business. SCHEDULE 2.1(a) is a
complete list of all Inventory as at the date thereof. At least
80% of all Inventory (based on the cost thereof on the books of
the Vendors) is located at 847 Rogers Street, Lowell,
Massachusetts.
(k) TANGIBLE ASSETS. To the best of the Companies' Knowledge, the
tangible property owned or leased by the Companies in connection
with the Business (other than buildings, structures and
facilities) (i) is in good operating condition and repair,
reasonable wear and tear excepted if consistent with age; (ii) is
fit for its intended purpose and usable in the ordinary course of
business; and (iii) conforms in all material respects to all
applicable Laws relating to its use or operation. SCHEDULE 2.1(c)
is a complete list of all Fixed Assets as at the date thereof.
(l) PROPRIETARY RIGHTS.
i) The Companies own or possess licenses or other rights to use all
trademarks, trade and business names, service marks, service
names, copyrights, patents, processes, methods of production,
trade secrets, know-how, technologies and inventions (whether or
not patentable), including all rights therein provided by
international treaties or conventions (collectively, "PROPRIETARY
RIGHTS"), that are applicable to the conduct of the Business as
currently conducted.
ii) SCHEDULE 4.1(l)(ii) sets forth a true and complete
list of all trademarks, trade and business names,
service marks, service names, copyrights and patents
included in the Proprietary Rights used in the
Business (identifying which are owned and which are
licensed), including all registrations or
applications for registration thereof and all
agreements relating thereto.
12
<PAGE>
iii) To the best of the Companies' Knowledge, the
Companies are not required to pay any royalty,
license fee or similar compensation in connection
with the use of any of the Proprietary Rights in the
conduct of the Business.
iv) To the best of the Companies' Knowledge, the
Companies have not, in the conduct of the Business,
interfered with, infringed upon, misappropriated or
otherwise come into conflict with the intellectual
property rights of any other Person or committed any
acts of unfair competition and no claims have been
asserted by any Person alleging such interference,
infringement, misappropriation, conflict or act of
unfair competition.
v) To the best of the Companies' Knowledge, no Person is
infringing upon any of the Proprietary Rights used in
the Business, and the Companies have not notified any
Person that it believes that such Person is
interfering with, infringing, misappropriating or
otherwise acting in conflict with any of such
Proprietary Rights or engaging in any act of unfair
competition.
vi) To the best of the Companies' Knowledge, there are no
Proprietary Rights that have been developed by any
consultant or employee of the Business that have not
been transferred to, or are not owned free and clear
of any Liens by, the Companies.
vii) To the best of the Companies' Knowledge, the
Companies have taken reasonable and practicable steps
(including, without limitation, entering into
confidentiality and nondisclosure agreements with all
officers, directors and employees of and consultants
to the Companies with access to or knowledge of the
Proprietary Rights used in the Business) designed to
safeguard and maintain the secrecy, confidentiality
and proprietary nature of the Proprietary Rights used
in the Business.
viii) To the best of the Companies' Knowledge, the
Companies have taken (or has ensured that the owner
thereof has taken) all necessary action in all
appropriate jurisdictions to register and maintain
the registration of all of the Proprietary Rights
used in the Business that may be registered.
(m) AGREEMENTS. SCHEDULE 4.1(m) lists all leases, contracts,
agreements and commitments related to the Products, the Purchased
Assets or the Business to which the Companies are a party or by
which the Companies are bound and which involve the payment or
receipt of sums in excess of US $5,000 per year in the aggregate
(the "MATERIAL AGREEMENTS"). With respect to each of the Material
Agreements which is an Assigned Contract: (i) a true and correct
copy, or if a copy is not available, a summary thereof, has been
delivered to the Purchaser; (ii) each is in full force and
effect, without breach or default by the Vendor or Industrial,
or, to the best of the Companies'
13
<PAGE>
Knowledge, any other party thereto; (iii) to the best of the
Companies' Knowledge, each is valid and legally binding against
the Vendor and/or Industrial and, to the best of the Companies'
Knowledge, the other parties thereto; (iv) to the best of the
Companies' Knowledge, there are no unresolved disputes with
respect to any of them; and (v) to the best of the Companies'
Knowledge, no notice has been received regarding termination of
any of them.
(n) LITIGATION. There is no claim, legal action, suit, arbitration or
other proceeding pending against or relating to either Vendor and
involving the Business or any of the Purchased Assets. As of the
Closing Date, neither the Vendor, the Business nor any of the
Purchased Assets shall be subject to any outstanding judgment,
order, writ, injunction or decree of any Governmental Authority.
(o) COMPLIANCE WITH LAWS. To the best of the Companies' Knowledge,
the Companies have obtained all material licenses, permits and
other authorizations from all applicable Governmental Authorities
necessary for the conduct of the Business as currently conducted.
SCHEDULE 4.1(o) hereto sets forth a true and complete list of all
such licenses, permits and other authorizations obtained by the
Companies, each of which is in full force and effect. The
Companies are in material compliance, and have complied, with all
Laws applicable to the Business and the Purchased Assets and has
not received any notice of any violation thereof.
(p) PRODUCTS AND WARRANTIES. The Products conform in all material
respects to all literature, product descriptions or other written
material of the Companies, and any warranties granted by the
Companies therewith. Set forth as SCHEDULE 4.1(p) are copies of
the Companies' warranties for the Products sold in the past five
years and a written statement describing customer service
policies and any recurring warranty problems for the Products.
The Companies do not have any outstanding contracts or proposals
for the Products which depart from the warranties and customer
service policies and practices described in such written
warranties and customer service policies.
(q) ENVIRONMENTAL MATTERS. To the best of the Companies' Knowledge,
the Companies' operation of the Business is in material
compliance with all applicable Laws relating to hazardous
substances, wastes, discharges, emissions, disposals, dumping,
burial or other forms of pollution, and the Companies have
received no written notice of any violation or alleged violation
thereof in connection with the operation of the Business. The
Companies have obtained all material environmental, health and
safety permits required by any Governmental Authority for the
operation of the Business as currently conducted and has complied
with all of the terms and conditions of all such permits.
(r) RELATED PARTY TRANSACTIONS. Except as set forth on SCHEDULE
4.1(r), no Related Party is directly or indirectly a party to any
contract or other arrangement (whether written or oral) with
either Vendor providing for services (other than as an employee
of the Companies), products, goods or supplies, rental of
personal property, or otherwise requiring payments from or to the
Companies with respect to the Business. For purposes hereof, the
term "RELATED PARTY" shall mean a director or officer of either
Vendor or any member of his immediate family or any corporation,
partnership, other business entity or trust in which he or any
member of his immediate family has greater than a ten percent
(10%) interest, or of which
14
<PAGE>
he or any member of his immediate family is an officer, director,
general partner or trustee.
(s) INSURANCE. SCHEDULE 4.1(s) sets forth, as of the date hereof (and
to be updated as of the Closing Date to reflect any changes), the
Vendors' currently effective insurance policies with respect to
the Purchased Assets and the Business (including property,
casualty, liability (general, products and directors' and
officers' and workers' compensation) listing for each policy the
identity of the insurance carrier, the policy period, the limits
and retentions and any special exclusions. Such policies are
currently in full force and effect and neither Vendor has
received any notice of termination on the part of the insurance
carriers. The Purchased Assets are insured with respect to loss
due to fire and other risks.
(t) TAXES. Except as set forth in SCHEDULE 4.1(t), the Companies have
filed when due (taking into account permitted extensions) with
the appropriate Governmental Authorities all tax returns,
estimates and reports required to be filed in respect of the
Business or the Purchased Assets ("TAX RETURNS"), all of which
Tax Returns are true and complete. Except as set forth in
SCHEDULE 4.1(t), the Companies have fully reported and has fully
paid when due and will continue to report and pay when due all
federal, state, and local Taxes of every kind, nature and
description that are due and payable or accrued with respect to
the Business. The Companies have all documentation (including
exemption certificates from customers) necessary to support the
exemptions, deductions or special Tax rates claimed on its Tax
Returns for sales/use, excise or similar gross receipt Taxes.
(u) INDUSTRY CERTIFICATIONS. Set forth on SCHEDULE 4.1(u) is a list
of all safety, manufacturing, quality and similar certifications
and approvals with respect to the Business and each of the
products manufactured, assembled, distributed or sold by either
Vendor in connection with the Business, and processes relating
thereto, which are currently in effect (collectively, the
"INDUSTRY CERTIFICATIONS"). Each of the Industry Certifications
is validly issued and in full force and effect. The Companies and
each of the products manufactured, assembled, distributed or sold
by the Vendors with respect to the Business, and processes
relating thereto, are in full compliance with the terms and
requirements of any Industry Certification applicable thereto.
(v) NO YEAR 2000 PROBLEM. To the best of the Companies' Knowledge,
none of the computer software used by the Vendors, or licensed by
the Vendors to any third party, in connection with the Business,
and none of the computer software or hardware in any of the
Products, contains any date fields or codes which could cause
such computer software or hardware to fail to perform any of its
intended functions in a proper manner in connection with the date
change occurring on January 1, 2000. To the best of the
Companies' Knowledge, such computer hardware and software is
capable of correctly processing all dates, whether such dates are
in the twentieth century, the twenty-first century or otherwise,
and, without limiting the generality of the foregoing, can,
i) manage and manipulate data involving dates, including
single century formulas, and will not cause abnormal
abend or abort with the application
15
<PAGE>
or result in the generation of incorrect values or
invalid output involving such dates,
ii) provide that all date-related user interface
functionalities and data fields include the
indication of the correct and intended century,
iii) provide that all date-related systems or
application-to-application data interface
functionalities will include the indication of the
correct and intended century to the extent that
sending or receiving systems or applications can send
or receive such information correctly, and
iv) can recognize the year 2000 as a leap year for all
data processing purposes.
(w) BROKERAGE FEES. Other than Charles M. Leighton and Gene Weiner,
the fees of each of whom shall be paid by the Vendors in the
manner described in Section 3.6, the Vendors have not engaged or
authorized any broker, investment banker or other Person to act
on its behalf, directly or indirectly, as a broker or finder who
might be entitled to a fee, commission or other remuneration in
connection with the transactions contemplated by this Agreement.
The fees payable to Charles M. Leighton as described in SCHEDULE
3.1 shall be paid directly to him by the Purchaser from the
Earnout Amount in the manner described in Section 3.6.
4.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
represents and warrants to the Vendors, as of the date hereof and as of
the Closing Date, and acknowledges that the Vendors are relying on same
for purposes of completing this transaction, as follows:
(a) ORGANIZATION. The Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Delaware.
(b) AUTHORITY. The Purchaser has full corporate power and
authority to enter into this Agreement and each of the
Ancillary Documents to which the Purchaser is a party, and to
carry out the transactions contemplated hereby and thereby.
The Purchaser has properly taken all corporate action required
to be taken by the Purchaser with respect to the execution and
delivery of this Agreement and each of the Ancillary Documents
to which the Purchaser is a party, and the consummation of the
transactions contemplated hereby and thereby.
(c) EXECUTION AND DELIVERY. This Agreement and each of the
Ancillary Documents to which the Purchaser is a party has been
duly executed and delivered by the Purchaser and constitutes a
legal, valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its
respective terms and conditions, except as enforceability
thereof may be limited by any applicable bankruptcy,
reorganization, insolvency or other similar Laws affecting
creditors' rights generally or by general principles of
equity.
(d) NO CONFLICTS. The execution, delivery and performance by the
Purchaser of this Agreement and each of the Ancillary
Documents to which the Purchaser is a party, and the
consummation of the transactions contemplated hereby and
16
<PAGE>
thereby, do not and will not violate, conflict with or result
in a breach of any term, condition or provision of, or require
the consent of any Person under, (i) any Law to which the
Purchaser is subject, (ii) any judgment, order, writ,
injunction, decree or award of any Governmental Authority to
which the Purchaser is subject, (iii) any of the Purchaser's
Organizational Documents or (iv) any license, agreement,
commitment or other instrument or document to which the
Purchaser is a party or by which the Purchaser is otherwise
bound. No authorization, approval or consent of, and no
registration or filing with, any Governmental Authority is
required in connection with the execution, delivery or
performance by the Purchaser of this Agreement or any of the
Ancillary Documents to which the Purchaser is a party.
(e) LITIGATION. There is no claim, legal action, suit, arbitration
or other proceeding pending, or to the best of the Purchaser's
knowledge, threatened against or relating to the Purchaser
which, if adversely determined, would have a material adverse
effect on the ability of the Purchaser to perform its
obligations under this Agreement or any of the Ancillary
Documents to which the Purchaser is a party, or would
otherwise prevent, hinder or delay consummation of the
transactions contemplated herein or therein.
ARTICLE 5 - CERTAIN COVENANTS
5.1 CONDUCT OF VENDOR PENDING THE CLOSING. Each of the Vendors covenants
and agrees that, prior to the Closing, except as contemplated by this
Agreement, it shall:
(a) conduct the Business in the usual, regular and ordinary course
consistent with the representations and warranties made in
Section 4.1 and prior to Closing, shall not sell or dispose of
any of the Purchased Assets or terminate any of the Assigned
Contracts;
(b) use its best efforts to maintain and preserve its business
organization and its relationships with customers, suppliers,
distributors, agents and others having business dealings with
the Business and retain the services of its officers and
employees with respect to the Business; and
(c) promptly advise the Purchaser if at any time following the
date hereof but prior to Closing: (i) any warrants or options
with respect to the shares of the Companies have been
exercised and the aggregate number of shares into which such
warrants and/or options are exercisable exceeds 5% of the
number of shares outstanding prior to execution of this
Agreement, and (ii) any such warrants or options are exercised
subsequent to the exercise described in (i).
5.2 NO SOLICITATION. Neither Vendor shall, directly or indirectly, initiate
contact with, solicit, encourage or participate in any way in
discussions or negotiations with, or provide any information or
assistance to, any Person (other than the Purchaser) concerning any
acquisition of the Business or the Purchased Assets. The Vendors shall
promptly communicate to the Purchaser the terms of any proposal or
contact that either Vendor receives in respect of any such transaction.
5.3 REASONABLE EFFORTS; FURTHER ASSURANCES. Upon the terms and subject to
the conditions of
17
<PAGE>
this Agreement, each of the parties hereto shall use all reasonable
efforts to take or cause to be taken all action, and to do or cause to
be done, and to assist and cooperate with the other parties in doing,
all things necessary, proper or advisable to consummate and make
effective as promptly as practicable the transactions contemplated by
this Agreement, including using reasonable efforts to (a) obtain all
consents, releases or approvals referred to in Section 6.2(d), and (b)
fulfill or cause the fulfillment of the conditions to Closing set forth
in Article 6. In case at any time after the Closing Date any further
action is reasonably necessary or desirable to carry out the purposes
of this Agreement, the Companies and the Purchaser shall take such
further action without additional consideration.
5.4 ACCESS AND INFORMATION.
(a) Prior to the Closing, the Companies shall afford to the
Purchaser and its accountants, counsel and other
representatives full access upon reasonable prior notice and
during normal business hours to all of the properties, books,
accounts, records, contracts, and personnel relating to the
Business and, during such period, each of the Vendors shall,
and shall cause its accountants, counsel and other
representatives to, furnish promptly to the Purchaser and its
representatives all information concerning the Business as the
Purchaser or its representatives may reasonably request.
(b) After the Closing, the Purchaser shall afford to the Vendors
and their accountants, counsel and other representatives
access to the books, records and personnel of the Purchaser
with respect to matters relating to the Business prior to the
Closing Date to the extent that the Vendors have a reasonable
need for the same (e.g., for Tax purposes or for purposes of
defending claims) and provided that such access does not
unreasonably interfere with the operations of the Business.
5.5 NOTIFICATION OF CERTAIN MATTERS. Each of the parties shall promptly
notify the other parties in writing:
(a) if, subsequent to the date of this Agreement and prior to the
Closing Date, it becomes aware of the occurrence of any event
or the existence of any fact that renders any of the
representations and warranties made in Section 4.1 or 4.2
inaccurate or untrue in any respect;
(b) of any notice or other communication from any third party
alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by
this Agreement; or
(c) of any notice or other communication from any Governmental
Authority in connection with the transactions contemplated
hereby.
5.6 EMPLOYMENT AGREEMENTS. Contemporaneously with the execution of this
Agreement, the Purchaser shall enter into employment agreements or
consulting agreements (as specified on Schedule 5.6) with each of the
employees of the Vendors listed on Schedule 5.6 (other than Wim van de
Kerkof) on terms satisfactory to the Purchaser (collectively, the
"Employment Agreements").
18
<PAGE>
5.7 PUBLIC ANNOUNCEMENTS. No party will issue or cause the publication of
any press release or other public announcement with respect to this
Agreement or the transactions contemplated hereby without the prior
written consent of the other party hereto; provided, however, that
nothing herein will prohibit any party from issuing or causing the
publication of any such press release or public announcement to the
extent that such party is advised by its legal counsel that such action
is required by law, in which case the party making such determination
will use reasonable efforts to allow the other party reasonable time to
comment on such release or announcement in advance of its issuance.
5.8 WARRANTY FULFILLMENT. After the Closing, to the extent that the
Companies refuse or are unable to fulfill the obligations of the
Companies under any outstanding warranties with respect to Products
sold by the Vendors prior to the Closing Date, the Purchaser shall have
the right, but not the obligation, to fulfill such obligations on
behalf of the Companies at the Purchaser's expense.
5.9 LOANS BY DR. YEH AND DR. AMODEI. Contemporaneously with the execution
of this Agreement: (a) Dr. Hsuan Yeh and Dr. Juan Amodei (the
"INVESTORS") shall make term loans in the amount of U.S.$300,000 (U.S.
$200,000 from Dr. Yeh and U.S. $100,000 from Dr. Amodei) to the
Purchaser evidenced by promissory notes (the "YEH/AMODEI NOTES")
attached hereto as SCHEDULE 5.9 with interest payable at 10% per annum,
with the interest payable semi-annually, and with the principal payable
3 years from the anniversary date of Closing, secured by a security
agreement granted by the Purchaser and charging all assets of the
Purchaser (the "YEH/AMODEI SECURITY AGREEMENT") attached hereto as
SCHEDULE 5.9; and (b) Focus, the Investors and the Purchaser shall
enter into an intercreditor agreement in the form attached hereto as
SCHEDULE 5.9 (the "FIRST INTERCREDITOR AGREEMENT") providing that (i)
the security interests granted by the Purchaser to Focus, and (ii) the
security interests granted by the Purchaser to the Investors pursuant
to the Yeh/Amodei Security Agreement shall rank pari passu and both
such security interests shall be subordinate to any security interests
granted by the Purchaser to one or more financial institutions from
time to time. The First Intercreditor Agreement shall also provide that
in the event that Focus guarantees any of the indebtedness of the
Purchaser to one or more financial institutions and Focus subsequently
makes a payment to such financial institution pursuant to such
guarantee, Focus shall rank ahead of the security interests described
in (i) and (ii) above to the extent of the amounts paid by Focus to
such financial institutions.
5.10 LOAN BY PURCHASER. Contemporaneously with the execution of this
Agreement and from time to time prior to Closing, the Purchaser may
(but is under no obligation to do so) make a loan or loans to the
Vendors upon the terms contained in the promissory note (the "PURCHASER
NOTE") attached hereto as SCHEDULE 5.10 and secured by a security
agreement granted by the Vendors and charging all assets of the Vendors
together with a collateral assignment of patents (collectively, the
"PURCHASER SECURITY AGREEMENT") attached hereto as SCHEDULE 5.10.
Contemporaneously with the execution of this Agreement, counsel to the
Vendors shall deliver to the Purchaser an opinion with respect to the
creation of a valid security interest by the Purchaser Security
Agreement and the enforceability of the Purchaser Note and the
Purchaser Security Agreement. Contemporaneously with the execution of
this Agreement, the Vendors shall obtain (i) an agreement from Dr. Yeh
providing that his existing security against the Vendors applies
19
<PAGE>
only to the equipment listed on SCHEDULE 5.10; (ii) a release from
Barry Levine with respect to all security and claims against the
Vendors and a UCC-3 termination statement in respect of UCC
registrations with respect to such security.
5.11 SECOND INTERCREDITOR AGREEMENT. Upon Closing, Focus, the Investors, the
Purchaser and the Vendors shall enter into an intercreditor agreement
in the form attached hereto as SCHEDULE 5.11 (the "SECOND INTERCREDITOR
AGREEMENT") providing that (i) the security interests granted by the
Purchaser to the Vendors pursuant to the Earnout Security Agreement
shall rank ahead, to the extent of U.S. $1,000,000, of the security
interests granted by the Purchaser to the Investors pursuant to the
Yeh/Amodei Security Agreement and the security interests granted by the
Purchaser to Focus, (ii) except for the priority described in (i), all
of the security interests described in (i) shall rank pari passu, and
(iii) all of the security interests in (i) shall rank subordinate to
any security interests granted by the Purchaser to one or more
financial institutions from time to time. The Second Intercreditor
Agreement shall also provide that in the event that Focus guarantees
any of the indebtedness of the Purchaser to one or more financial
institutions and Focus subsequently makes a payment to such financial
institution pursuant to such guarantee, Focus shall rank ahead of the
security interests described in (i) above to the extent of the amounts
paid by Focus to such financial institutions. Upon Closing, the
Purchaser shall execute a collateral assignment of patents (in
substantially the form attached hereto as SCHEDULE 5.10) in favour of
the Investors as further security for the Investor Notes and in favour
of the Vendors as further security for the Earnout Amount.
5.12 IMPRIMIS. Contemporaneously with the execution of this Agreement, the
Vendors shall deliver to the Purchaser (i) a release by Imprimis of all
claims, actions or demands it can, shall or may have against either of
the Vendors, and (ii) a withdrawal by Imprimis Investors L.L.C.
("IMPRIMIS") and related parties which held shares and/or warrants in
the Vendors of the judgment issued in the Supreme Court of the State of
New York against Industrial.
5.13 ASSET ADVANCES. On Closing, indebtedness of the Vendors to the
Purchaser equal to the aggregate amount of the Asset Advances shall be
forgiven by the Purchaser.
5.14 PROXIES. Contemporaneously with the execution of this Agreement, the
Purchaser shall have received irrevocable proxies approving the
transaction contemplated by this Agreement executed by at least 70% of
the shareholders of Industrial.
5.15 PATENTS. The Investors acknowledge and agree that they do not have any
security interest in or encumbrance on the Proprietary Rights listed on
SCHEDULE 4.1(l)(ii) and that they will take all steps and execute all
documents necessary to confirm the foregoing and to remove any
registrations with respect to security interests in any governmental
office or recording system.
ARTICLE 6 - CONDITIONS TO CLOSING
6.1 CONDITIONS TO OBLIGATION OF THE VENDORS. The obligation of the Vendors
to consummate the transactions contemplated hereby shall be subject to
the satisfaction on or prior to the Closing of the following conditions
(any of which may be waived in writing by the Vendor):
20
<PAGE>
(a) the Purchaser shall have performed and complied in all
material respects with all obligations and agreements required
to be performed and complied with by it hereunder on or prior
to the Closing Date (including, without limitation, those
specified in Section 7.3);
(b) the representations and warranties of the Purchaser contained
in this Agreement shall be true and correct in all material
respects at and as of the Closing Date as if made at and as of
such date (other than those representations and warranties
that (i) are qualified as to materiality, which shall be true
and correct, and (ii) address matters only as of a particular
date or only with respect to a specific period of time, which
need only be true and accurate as of such date or with respect
to such period);
(c) no action, suit, claim or proceeding by or before any
Governmental Authority shall be pending which seeks to
restrain, prevent or materially delay or restructure the
transactions contemplated hereby or which otherwise questions
the validity or legality of any such transactions;
(d) warrants in the form attached hereto as SCHEDULE 6.1(d) to
purchase common shares in Focus shall be issued to the
Investors expiring on the earlier of three years from Closing
or the completion by Focus of an initial public offering, with
an exercise price equal to the purchase price per share (the
"Issue Price") paid by the equity investors who finance the
acquisition contemplated by this Agreement. The number of
warrants issuable will equal U.S. $60,000 ($20,000 to Dr.
Amodei and $40,000 to Dr. Yeh) divided by the Issue Price; and
(e) the shareholders of the Companies shall have approved the
acquisition contemplated by this Agreement, in accordance with
all applicable laws and regulations, including those governing
proxy solicitation.
6.2 CONDITIONS TO OBLIGATION OF THE PURCHASER. The obligation of the
Purchaser to consummate the transactions contemplated hereby shall be
subject to the satisfaction on or prior to the Closing of the following
conditions (any of which may be waived in writing by the Purchaser):
(a) each of the Vendors shall have performed or complied in all
material respects with all obligations and agreements required
to be performed or complied with by it hereunder on or prior
to the Closing (including, without limitation, those specified
in Section 7.2);
(b) the representations and warranties of the Companies contained
in this Agreement shall be true and correct in all material
respects at and as of the Closing Date as if made at and as of
such date (other than those representations and warranties
that (i) are qualified as to materiality, which shall be true
and correct, and (ii) address matters only as of a particular
date or only with respect to a specific period of time, which
need only be true and accurate as of such date or with respect
to such period);
(c) no action, suit, claim or proceeding by or before any
Governmental Authority shall be pending which seeks to
restrain, prevent or materially delay or
21
<PAGE>
restructure the transactions contemplated hereby or which
otherwise questions the validity or legality of any such
transactions;
(d) the Companies shall have obtained on terms and conditions
reasonably satisfactory to the Purchaser all consents,
releases and approvals of third parties (including
Governmental Authorities) that are required (i) for the
consummation of the transactions contemplated hereby or (ii)
in order to prevent a material breach of, a default under or a
termination, material change in the terms or conditions or
material modification of, any Material Agreement as a result
of the consummation of the transactions contemplated;
(e) the Purchaser shall be satisfied with its business, legal, and
financial due diligence investigation and review of the
Business;
(f) the board of directors of the Purchaser shall have approved
the acquisition contemplated by this Agreement;
(g) the preliminary proxy statement of Industrial with respect to
the transactions contemplated by this Agreement shall have
been delivered to the Securities & Exchange Commission not
later than 10 Business Days following the date hereof;
(h) the Purchaser shall have received from the Dr. Yeh on Closing
a standby letter of credit (the "LETTER OF CREDIT") from a
financial institution approved by the Purchaser, in the amount
of U.S.$300,000 on terms approved by the Purchaser, including
but not limited to, that the Letter of Credit shall have a
term of one year from Closing and may be drawn upon by the
Purchaser in the event that the Purchaser presents to the
issuing bank a certificate of a senior officer of the
Purchaser certifying that the Purchaser has determined that it
requires working capital in excess of U.S. $3,300,000; in the
event that the Purchaser draws on the Letter of Credit each
amount drawn shall be a loan to the Purchaser upon the same
terms as set forth in Section 5.9 with the term of such loan
being three years from the draw date and the Purchaser shall
issue to Dr. Yeh a number of warrants (upon the same terms and
conditions as contained in the warrants described in
subsection 6.1 (d)) equal to U.S $1 divided by the Issue Price
for each U.S. $5 drawn;
(i) the Purchaser or Focus shall have obtained working capital
financing (equity or subordinated debt) in the minimum
aggregate amount of U.S.$3,000,000 from a financial
institution and/or investors, on terms satisfactory to the
Purchaser; and
(j) the value of the Purchased Assets (as determined pursuant to
Sections 3.3 and 3.4) shall be a minimum of US$1,000,000 at
Closing, such value to be determined by the Purchaser in
accordance with GAAP and Section 3.4.
22
<PAGE>
ARTICLE 7 - CLOSING
7.1 CLOSING. The closing of the transactions contemplated hereby (the
"CLOSING") shall take place at the offices of Gowling, Strathy &
Henderson, at 10:00 a.m. on such date that is not earlier than the
third Business Day following the later of (a) the date on which the
Companies' shareholders formally approve the transactions contemplated
by this Agreement, and (b) the date on which all of the conditions
contained in Sections 6.01 and 6.02 have been satisfied or waived, or
at such other place, at such other time or on such later date as the
parties may mutually agree. The date on which the closing actually
occurs is referred to herein as the "CLOSING DATE".
7.2 DELIVERIES BY THE VENDOR. Subject to the terms and conditions hereof,
the Vendors shall deliver the following to the Purchaser at or before
the Closing:
(a) such bills of sale and assignments (including of rights to
license and use Proprietary Rights); titles; releases;
estoppel certificates; duly endorsed certificates of title to
motor vehicles to be transferred; consents to the transfer or
assignment of Assigned Contracts to the extent required by the
terms of the Assigned Contracts; endorsements; and other good
and sufficient instruments and documents of conveyance and
transfer, in form and substance reasonably satisfactory to the
Purchaser and its counsel, as shall be necessary and
effective, as determined by the Purchaser and its counsel, to
transfer and assign to, and vest in, the Purchaser all right,
title and interest in and to the Purchased Assets, including,
but not limited to, title in and to all of the Purchased
Assets owned by the Vendors, leasehold interests in and to all
of the leased Purchased Assets, all of the Vendors' rights
under the Assigned Contracts, and all other rights or property
interests of the Companies included in the Purchased Assets;
(b) a certificate of the Secretary or Assistant Secretary of each
Vendor attesting to (i) due authorization of the execution and
delivery of this Agreement and the Ancillary Documents and the
consummation of the transactions contemplated hereby and
thereby by the Board of Directors of such Vendor, and (ii) the
incumbency of the Vendors' officers executing this Agreement
and the Ancillary Documents delivered by such Vendor
hereunder;
(c) evidence that the Vendors have obtained on terms and
conditions reasonably satisfactory to the Purchaser all
consents, releases and approvals of the shareholders of the
Companies and of third parties (including Governmental
Authorities) that are required (i) for the consummation of the
transactions contemplated hereby or (ii) in order to prevent a
material breach of, a default under or a termination, material
change in the terms or conditions or material modification of,
any Material Agreement as a result of the consummation of the
transactions contemplated hereby;
(d) a certificate of each Vendor, in form and substance reasonably
satisfactory to the Purchaser, dated the Closing Date and
signed by the President or a Vice President, certifying
compliance with the conditions set forth in Sections 6.2(a)
and 6.2(b);
(e) an opinion of counsel to the Vendors, substantially in the
form of SCHEDULE 7.2 (e).
23
<PAGE>
7.3 ACTIONS OR DELIVERIES BY THE PURCHASER. Subject to the terms and
conditions hereof, the Purchaser shall deliver the following to the
Vendors at or before the Closing:
(a) the Initial Payment;
(b) a certificate of the Secretary or Assistant Secretary of the
Purchaser attesting to (i) due authorization of the execution
and delivery of this Agreement and the Ancillary Documents and
the consummation of the transactions contemplated hereby and
thereby by the Board of Directors of the Purchaser and (ii)
the incumbency of the Persons executing this Agreement and the
Ancillary Documents delivered by the Purchaser hereunder;
(c) a certificate of the Purchaser, in form and substance
reasonably satisfactory to the Vendors, dated the Closing Date
and signed by the President or a Vice President of the
Purchaser, certifying compliance with the conditions set forth
in Sections 6.1(a) and 6.1(b)(i); and
(d) an opinion of counsel to the Purchaser substantially in the
form of SCHEDULE 7.3(d).
7.4 OTHER DOCUMENTS. The parties agree to execute and deliver on or before
the Closing all other documents and certificates that are necessary or
advisable in order to consummate the transactions contemplated hereby.
ARTICLE 8 - EXPENSES AND APPORTIONMENTS
8.1 APPORTIONMENTS. The parties shall apportion, on a per diem basis,
between the Vendors and the Purchaser as of the close of business on
the day immediately preceding the Closing Date amounts payable by the
Vendors under the Assigned Contracts, including, but not limited to,
leases of personal property.
8.2 TRANSFER TAXES. Any personal property transfer Taxes, documentary
stamps, sales Taxes, goods and services Taxes and other Taxes, fees or
charges imposed by any state, county, province, municipality or other
Governmental Authority in connection with the sale, assignment,
transfer and conveyance of any of the Purchased Assets by the Vendors
to the Purchaser shall be paid by the Purchaser.
8.3 EXPENSES. Each of the Purchaser, the Vendors shall pay their own
expenses, including, but not limited to, attorneys', accountants',
financial advisors' and brokers' or finders' fees, incurred in
connection with the transactions contemplated hereby.
ARTICLE 9 - RESTRICTIVE COVENANTS
9.1 NON-COMPETITION; NON-INTERFERENCE. The Companies agree that for a
period of five years after the Closing Date, the Vendors shall not, and
shall not permit any of their Affiliates to, either alone or in
conjunction with any other Person:
(a) own, manage, operate, provide financing to, or participate in
the ownership, management, operation or control of, or
24
<PAGE>
provision of financing to, any business wherever located if
such business (i) manufactures or sells any products or
services in the field of applications of machine vision or
(ii) sells any products competitive with the Products; or
(b) induce or attempt to induce any customer, supplier, licensee,
licensor, distributor or other business relation of the
Purchaser to cease doing business with the Purchaser with
respect to the Business or the Products or in any way
interfere with the relationship between any such customer,
supplier, licensee, licensor, distributor or business relation
and the Purchaser with respect to the Business or the Products
(including, without limitation, making any negative statements
or communications about the Purchaser or the Products).
9.2 CONFIDENTIAL INFORMATION. From and after the Closing, the Vendors shall
not use or disclose or permit any of its respective Affiliates to use
or disclose to any Person any trade secrets, confidential information,
know-how or other proprietary information it possesses relating to the
Business or the Products and shall use its best efforts to prevent such
use or disclosure.
9.3 CERTAIN ACKNOWLEDGMENTS. The Vendors specifically acknowledge and agree
that the restrictions set forth herein are reasonable in scope and
essential to the preservation of the value of the Purchased Assets and
the Business after the Closing. The Vendors further acknowledge and
agree that the remedy at law for any breach of the restrictions set
forth herein will be inadequate and that the Purchaser, in addition to
any other relief available to it, shall be entitled to temporary and
permanent injunctive relief without the necessity of posting a bond or
proving actual damage. In the event that the provisions of this Section
9.3 should ever be held by a court to exceed the restrictions permitted
by applicable law, then the parties hereto agree that such provisions
shall be reformed to set forth the maximum restrictions permitted by
law.
9.4 TOLLING. In the event of any breach by the Vendor of the covenants
contained in Section 9.1 or 9.2, the running of the applicable period
of restriction shall be automatically tolled and suspended for the
duration of such breach, and shall automatically recommence when such
breach is remedied in order that the Purchaser shall receive the full
benefit of the Vendors' compliance with the covenants contained in
Sections 9.1 and 9.2.
ARTICLE 10 - TERMINATION
10.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing:
(a) by mutual consent of the Purchaser and the Vendors; or
(b) by either the Purchaser or the Vendors if the Closing shall
not have been consummated on or before January 31, 2000
(provided that the terminating party is not otherwise in
material breach of its obligations under this Agreement).
10.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement in accordance with Section 10.1, this Agreement shall
thereafter become void (other than Sections 5.7 and 8.3, which shall
survive any termination hereof) and there shall be no obligation on the
part of any party hereto or their respective directors, officers,
stockholders or agents,
25
<PAGE>
except that any such termination shall be without prejudice to the
rights of any party hereto arising out of the material breach by any
other party of any covenant or agreement contained in this Agreement.
10.3 NON-COMPLETION FEE. Notwithstanding Section 10.2, if for any reason
other than the fault solely of the Purchaser, the purchase by the
Purchaser of the Purchased Assets at the Purchase Price is not
completed or if a transaction is completed on or before March 16, 2000
pursuant to which the Purchased Assets or the shares of the Vendors are
sold or a transaction is completed which has the same effect as such a
sale of the Purchased Assets or the shares of the Vendors upon
financial terms which are equivalent to or more favourable to the
Vendors or its shareholders than the terms contained in this Agreement,
then the Vendors jointly and severally agree to immediately pay or
cause the party who purchases the Purchased Assets or any portion
thereof or the shares of the Vendor to immediately pay to the Purchaser
a non-completion fee of $125,000, which the parties agree is a
reasonable estimate of costs incurred by Focus as a result of this
transaction and which shall be secured by the Purchaser Security
Agreement.
ARTICLE 11 - INDEMNIFICATION
11.1 INDEMNIFICATION BY THE COMPANIES. Subject to the terms of this Article
11, the Purchaser shall be indemnified and held harmless by the
Companies from and against any Liability, loss, damage or expense,
including, without limitation, reasonable legal and accountants' fees
(collectively, "Losses"), suffered or incurred by the Purchaser which
arise out of or result from:
(a) any inaccuracy in or breach of any of the representations and
warranties of the Vendors contained in Section 4.1; or
(b) any breach by either Vendor of any covenant or agreement of
such Vendor contained in this Agreement; or
(c) any Companies' Liabilities; or
(d) the ownership or operation of the Business on or prior to the
Closing Date, including without limitation, with respect to:
i) wages, salaries or benefits of employees, and for
greater clarity, vacation and sick time shall be
reconciled by either Vendor completely up to the
Closing Date and all disability, benefits, insurance,
pension and other funds or plans relating to such
Vendor's employees shall be fully funded as of the
Closing Date; and
ii) the termination of the employment of all of either
Vendor's employees; or
(e) any inaccuracy in any of the representations and warranties of
the Vendors contained in subsections 4.1(d), (i) or (w) as if
such representations and warranties had been made without
reference therein to "to the best of the Companies'
Knowledge".
11.2 INDEMNIFICATION BY THE PURCHASER. Subject to the terms of this Article
11, the Vendors
26
<PAGE>
shall be indemnified and held harmless by the Purchaser from and
against any Losses suffered by the Vendors which arise out of or result
from any inaccuracy in or breach of any of the representations,
warranties, covenants or agreements made by the Purchaser in this
Agreement.
11.3 METHOD OF ASSERTING THIRD PARTY CLAIMS. Promptly after the assertion by
any third party of any claim, demand or notice against any Person that
may be entitled to indemnification under this Article 11 with respect
to such claim (the "INDEMNIFIED PARTY"), the Indemnified Party shall
promptly notify the party from whom indemnification may be sought (the
"INDEMNIFYING PARTY"), specifying the nature of such claim and the
amount or the estimated amount thereof to the extent then feasible
(which estimate shall not be conclusive of the final amount of such
claim) (the "CLAIM NOTICE"). Within twenty days after receipt of a
Claim Notice (the "NOTICE PERIOD"), the Indemnifying Party may assume
the defense of such claim; provided, however, that (i) the Indemnifying
Party shall retain counsel reasonably acceptable to the Indemnified
Party, (ii) the Indemnifying Party agrees in writing that it is liable
to indemnify the Indemnified Party for all losses resulting from such
Claim, and (iii) the Indemnifying Party shall not, without the prior
written consent of the Indemnified Party (which consent shall not be
unreasonably withheld or delayed), enter into any settlement of a
claim, consent to the entry of any judgment with respect to a claim or
cease to defend a claim, if pursuant to or as a result of such
settlement, consent or cessation, injunctive or other equitable relief
shall be imposed against the Indemnified Party or if such settlement
does not expressly and unconditionally release the Indemnified Party
from all Liabilities with respect to such claim, with prejudice. The
Indemnified Party may participate in the defense of such claim with
co-counsel of its choice; provided, however, that the fees and expenses
of the Indemnified Party's counsel shall be paid by the Indemnified
Party unless (A) the Indemnifying Party has agreed in writing to pay
such fees and expenses, (B) the Indemnifying Party has failed to assume
the defense and employ counsel as provided herein, or (C) a claim shall
have been brought or asserted against the Indemnifying Party as well as
the Indemnified Party, and the Indemnified Party shall have been
advised in writing by outside counsel that there may be one or more
factual or legal defenses available to it that are in conflict with
those available to the Indemnifying Party, in which case such
co-counsel shall be at the expense of the Indemnifying Party. If the
Indemnifying Party does not assume the defense of such claim, the
Indemnified Party may defend against the same in any manner that it
reasonably deems appropriate.
11.4 METHOD OF ASSERTING DIRECT CLAIMS. In the event an Indemnified Party
desires to assert a claim for indemnification against an Indemnifying
Party that does not involve a third party, the Indemnified Party shall
promptly send a Claim Notice with respect to such claim to the
Indemnifying Party. If the Indemnifying Party does not notify the
Indemnified Party within the Notice Period that it disputes such claim,
the amount of Losses suffered or incurred by the Indemnified Party with
respect to such claim shall be conclusively deemed a Liability of the
Indemnifying Party hereunder.
11.5 SETOFF AGAINST EARNOUT PAYMENTS. The Purchaser shall be entitled to
deduct from and set off against the Earnout Amount payable to the
Vendors the amount of any Losses for which it is entitled to
indemnification from the Companies under Section 11.1 and may hold in
reserve out of any payments in respect of the Earnout Amount ("EARNOUT
PAYMENT") otherwise due to the Vendors the Purchaser's reasonable
estimate of Losses which may be incurred by the Purchaser with respect
to any claim for which a Claim
27
<PAGE>
Notice has been given but which is not yet resolved at the time such
Earnout Payment is due (an "UNRESOLVED CLAIM"). At such time as an
Unresolved Claim is finally determined, the amount of any Losses for
which the Purchaser is entitled to indemnification shall be set off
against the Earnout Payments withheld (and any other Earnout Payments
which remain unpaid, to the extent that the amount of such Losses
exceeds the amount of Earnout Payments previously withheld) and
retained by the Purchaser, and the balance, if any, of the amount
withheld shall be promptly paid to the Vendors. The Purchaser shall
promptly notify the Vendors of any setoff which the Purchaser intends
to make against any Earnout Payments and of any amount which the
Purchaser intends to hold in reserve with respect to any Unresolved
Claims.
11.6 OTHER INDEMNIFICATION PAYMENTS. Except for any Losses which the
Purchaser elects to set off against Earnout Payments pursuant to
Section 11.5, all indemnified Losses shall be payable within thirty
days after the Indemnified Party notifies the Indemnifying Party or
Parties that such Losses have been suffered or incurred (including
those relating to the on-going costs of defending third party claims in
accordance with Section 11.3).
11.7 TAX TREATMENT OF INDEMNIFICATION PAYMENTS; SUBROGATION. Any
indemnification payment made pursuant to this Article 11 shall be
treated by the parties hereto as an adjustment to the Purchase Price
for income tax purposes to the extent of the Purchase Price. Upon the
payment in full of any claim, the Indemnifying Party shall be
subrogated to the rights of the Indemnified Party against any Person or
entity with respect to the subject matter of such claim.
11.8 SURVIVAL OF REPRESENTATIONS AND EARNOUT COVENANT. All of the
representations and warranties contained in this Agreement shall
survive for a period of two years following the Closing Date, except
for (a) those contained in Sections 4.1(q) and 4.1(t), which shall
survive until three months following the expiration of the statute of
limitations applicable with respect to claims that constitute a breach
of, or are the subject of, such representations and warranties, and (b)
those contained in Section 4.1(h) or those fraudulently made, which
shall survive indefinitely. In addition, the Purchaser's obligation to
pay the Earnout Amount shall survive until the later of (i) the Earnout
Payment Date or (ii) the date on which the Earnout Amount is fully
paid. No claim for indemnification may be made under this Article 11
for breach of a representation or warranty unless a Claim Notice is
given within the applicable survival period set forth herein.
11.9 FAILURE TO GIVE TIMELY NOTICE. Except as provided in Section 11.8, a
failure by an Indemnified Party to give timely, complete or accurate
notice as required under Sections 11.3 or 11.4 shall not affect the
rights or obligations of any party hereunder except and only to the
extent that, as a result of such failure, any party entitled to receive
such notice was deprived of its right to recover any payment under its
applicable insurance coverage or was otherwise damaged or prejudiced as
a result of such failure to give timely notice.
11.10 EXCLUSIVE REMEDY. The rights of the parties to indemnification under
this Agreement or with respect to the transactions contemplated hereby
shall be strictly limited to those contained in this Article 11, and
such indemnification rights shall be the exclusive remedies of the
parties subsequent to the Closing Date with respect to any matter in
any way relating to this Agreement or arising in connection herewith,
except to the extent that the same shall have been the result of fraud.
28
<PAGE>
ARTICLE 12 - MISCELLANEOUS
12.1 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered
personally (including delivery by courier service), transmitted by
facsimile with receipt confirmed electronically, or mailed by
registered or certified mail, postage prepaid, return receipt
requested, as follows:
(a) if to the Purchaser, to:
Focus AOI, Inc.
101 Randall Drive
Waterloo, ON N2V 1C5
Attention: David Chornaby
Facsimile: (519) 746-6754
with a copy (which shall not constitute notice) to:
Gowling, Strathy & Henderson
1020 - 50 Queen Street North
Kitchener, Ontario
Canada N2H 6M2
Attention: W. David Petras
Facsimile: (519) 571-5006
(b) if to the Vendor, to:
AOI International, Inc.
847 Rogers Street
Lowell, Massachusetts, U.S.A. 01852
Attention: Juan Amodei
Facsimile: (978) 453-0661
with a copy (which shall not constitute notice) to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts
U.S.A. 02111
Attention: Neil Aronson
Facsimile: (617) 542-2241
(c) if to Industrial, to:
Industrial Imaging Corporation
847 Rogers Street
Lowell, Massachusetts, U.S.A. 01852
Attention: Juan Amodei
Facsimile: (978) 453-0661
29
<PAGE>
with a copy (which shall not constitute notice) to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts
U.S.A. 02111
Attention: Neil Aronson
Facsimile: (617) 542-2241
or to such other address as the Person to whom notice is to be given
may have previously furnished to the other parties in writing in
accordance herewith. Notice shall be deemed given on the date received
(or, if receipt thereof is refused, on the date of such refusal).
12.2 AMENDMENTS AND WAIVERS. This Agreement may not be amended, modified or
supplemented except by written agreement of the parties hereto. No
waiver by any party of any default, misrepresentation or breach of
warranty or covenant hereunder, whether intentional or not, shall be
deemed to extend to any prior or subsequent default, misrepresentation
or breach of warranty or covenant hereunder or affect in any way any
rights arising by virtue of any prior or subsequent such occurrence.
12.3 NO PRESUMPTION AGAINST DRAFTER. Each of the parties hereto has had the
opportunity to participate in the negotiation and drafting of this
Agreement and each of the Ancillary Documents. In the event there
arises any ambiguity or question of intent or interpretation, this
Agreement and each of the Ancillary Documents shall be construed as if
drafted jointly by all of the parties hereto and no presumptions or
burdens of proof shall arise favoring any party by virtue of the
authorship of any of the provisions of this Agreement or any of the
Ancillary Documents.
12.4 NONASSIGNABILITY. This Agreement shall not be assigned without the
consent of the other parties hereto, by operation of law or otherwise,
except that the rights and obligations of the Purchaser hereunder may
be assigned to any Affiliate of the Purchaser (except that no such
assignment shall relieve the Purchaser of its obligations hereunder).
12.5 PARTIES IN INTEREST. This Agreement shall be binding upon and inure
solely to the benefit of the parties hereto and their respective
successors and permitted assigns, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any
rights or remedies of any nature.
12.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original
and shall become effective when one or more counterparts have been
signed by each party hereto and delivered to the other.
12.7 GOVERNING LAW. All questions concerning the construction, validity and
interpretation of this Agreement shall be governed by and construed and
enforced in accordance with the laws of the Province of Ontario and the
laws of Canada applicable therein, without regard to the conflicts of
law principles of such Province.
12.8 SEVERABILITY. If any term or provision of this Agreement shall, to any
extent, be held by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this
30
<PAGE>
Agreement or the application of such term or provision to Persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall not be affected thereby and this Agreement shall
be deemed severable and shall be enforced otherwise to the full extent
permitted by law; provided, however, that such enforcement does not
deprive any party hereto of the benefit of the bargain.
12.9 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits
referred to herein and which form a part hereof) constitutes the entire
agreement between the parties hereto and supersede all prior agreements
and understandings, oral and written, between the parties hereto with
respect to the subject matter hereof including, without limitation, the
letter of intent dated July 16, 1999 from Focus to Industrial and
accepted by Industrial and the Investors.
12.10 CURRENCIES; EXCHANGE RATE. All references to "US$" shall be deemed to
refer to United States dollars. The exchange rate for purposes of
Section 6.1(d) and 6.2(h) shall be the Bank of Canada noon spot rate in
effect on the Business Day prior to the date of issuance of the
warrants.
12.11 ARBITRATION. Any controversy, dispute or claim arising out of or in
connection with this Agreement, or the breach, termination or validity
hereof including claims by either party for indemnity pursuant to
Article 11, shall be settled by final and binding arbitration to be
conducted by a single arbitrator in Toronto, Ontario, pursuant to the
rules of the American Arbitration Association. The parties shall agree
upon an arbitrator within 10 days of the request for arbitration
failing which the party initiating arbitration shall nominate one
arbitrator and the second party shall nominate a second within 10 days
of the initiating party nominating an arbitrator. The two arbitrators
so named will then jointly appoint the third arbitrator who shall
conduct the arbitration. If the answering party fails to nominate its
arbitrator within the ten day period, or if the arbitrators named by
the parties fail to agree on the third arbitrator within 10 days, the
American Arbitration Association shall make the necessary appointment
of such arbitrator. The decision or award of the arbitrator shall be
final, and judgment upon such decision or award may be entered in any
competent court or application may be made to any competent court for
judicial acceptance of such decision or award and an order of
enforcement. In the event of any procedural matter not covered by the
aforesaid rules, the procedural law of the Province of Ontario shall
govern.
31
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the Purchaser and the Vendors on the date first above written.
FOCUS AOI, INC.
By: /s/ Ronald Stauss
---------------------------------------
Name: Ronald Strauss
Title: President
By: /s/ David Chornaby
---------------------------------------
Name: David Chornaby
Title: Secretary
We have authority to bind the Corporation.
AOI INTERNATIONAL, INC.
By: /s/ Juan J. Amodei
----------------------------------------
Name: Juan J. Amodei
Title: President
I have authority to bind the Corporation.
INDUSTRIAL IMAGING CORPORATION
By: /s/ Juan J. Amodei
----------------------------------------
Name: Juan J. Amodei
Title: President
I have authority to bind the Corporation.
32
<PAGE>
EXHIBIT B
FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying consolidated balance sheets of Industrial Imaging
Corporation and subsidiary as of March 31, 1999 and September 30, 1999 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the year and six months then ended have been prepared by
management and are unaudited, but in the opinion of management, include all the
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows of
the Company. The accompanying consolidated balance sheets of Industrial Imaging
Corporation and subsidiary as of March 31, 1998 and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
year then ended were audited by BDO Seidman, LLP and their opinion was included
in the Company's Form 10-KSB for the year ended March 31, 1998 filed with the
Securities and Exchange Commission.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has been unable to pay certain debt obligations as they become due. This
situation raises substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
<PAGE>
INDUSTRIAL IMAGING CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31, March 31,
1999 1999 1998
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 15,630 $ 5,686 $ 671,195
Accounts receivable, net of allowance for doubtful accounts of
$28,685 at September 30, 1999, $29,153 at March 31, 1999 and 199,281 462,624 214,450
$31,000 at March 31, 1998 respectively (Notes C and D)
Inventory (Notes C and E) 846,659 885,955 1,995,194
Prepaid expenses 43,293 60,722 75,282
----------- ----------- -----------
Total current assets 1,104,863 1,414,987 2,956,121
Property and equipment, net (Notes C and F) 197,064 241,713 59,150
Patents, net (Notes C and G) -- -- --
Other assets 7,600 7,600 7,600
----------- ----------- -----------
Total assets $ 1,309,527 $ 1,664,300 $ 3,022,871
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable (Note J) $ 813,922 $ 787,028 $ 715,334
Accounts payable 1,461,872 1,259,920 599,785
Deferred revenue (Note C) 82,371 52,121 342,705
Accrued expenses (Note I) 1,083,597 934,531 834,212
----------- ----------- -----------
Total current liabilities 3,441,762 3,033,600 2,492,036
Notes payable -- long-term portion (Note J) 235,848 280,508 152,217
----------- ----------- -----------
Total liabilities 3,677,610 3,314,108 2,644,253
Commitments and contingencies (Notes H and N) -- -- --
Shareholders' equity (deficit) (Notes J, K, L and O):
Common stock, par value $.01 per share, authorized 20,000,000
shares, 10,890,201 shares issued and outstanding at September 30, 1999
and March 31, 1999 and 1998 108,902 108,902 108,902
Series A Preferred Stock, par value $.01 per share, authorized 1,000,000,
0 shares issued and outstanding at September 30, 1999 and March -- -- --
31, 1999 and 1998
Series B Preferred Stock, par value $.01 per share, authorized 300,000, 0
shares issued and outstanding at September 30, 1999 and March
31, 1999 and 1998 -- -- --
Additional paid-in capital 10,794,439 10,794,439 10,794,439
Accumulated deficit (13,146,424) (12,428,149) (10,399,723)
----------- ----------- -----------
(2,243,083) (1,524,808) 503,618
Note receivable (Note L) (125,000) (125,000) (125,000)
----------- ----------- -----------
Total shareholders' equity (deficit) (2,368,083) (1,649,808) 378,618
----------- ----------- -----------
Total liabilities and shareholders' equity (deficit) $ 1,309,527 $ 1,664,300 $ 3,022,871
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of financial statements.
2
<PAGE>
INDUSTRIAL IMAGING CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
September 30 March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues (Notes C and P):
Product $ 172,288 $ 2,431,460 $ 3,505,920 $ 1,896,524
Service 256,071 202,082 501,351 408,685
------------ ------------ -------------- ------------
428,359 2,633,542 4,007,271 2,305,209
Cost of revenues:
Product 198,981 1,837,443 3,227,844 2,239,678
Service 342,534 163,193 450,451 398,498
------------- ------------ -------------- ------------
541,515 2,000,636 3,678,295 2,638,176
Gross profit (loss) (113,156) 632,906 328,976 (332,967)
Operating expenses:
Research and development (Note C) 176,963 412,516 677,296 344,068
Sales and marketing 120,268 517,363 777,016 545,097
General and administrative (Note H) 244,847 400,023 752,661 1,044,751
------------- ------------ -------------- ------------
Total operating expenses 542,078 1,329,902 2,206,973 1,933,916
Loss from operations (655,234) (696,996) (1,877,997) (2,266,883)
Other expense ( income):
Interest expense, net (Notes D and J) 65,246 73,341 152,389 146,314
Other expense (income), net (2,205) (3,144) (1,960) 20,357
------------- ------------ -------------- ------------
Other expense (income), net 63,041 70,197 150,429 166,671
Loss before income taxes (718,275) (767,193) (2,028,426) (2,433,554)
Provision for income taxes (Notes C and M) -- -- -- --
Net loss ($718,275) ($767,193) ($2,028,426) ($2,433,554)
============= ============ ============== =============
Net loss per common share - Basic and
Diluted (Note K) ($0.07) ($0.07) ($0.19) ($0.30)
============= ============ ============= ============
Weighted average common shares outstanding 10,890,201 10,890,201 10,890,201 8,090,583
============= ============ ============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
INDUSTRIAL IMAGING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
September 30, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($718,275) ($767,193) ($ 2,028,426) ($ 2,433,554)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 44,649 40,425 93,737 14,156
Loss on disposal of demonstration
equipment -- -- (20,833) --
Compensation relating to stock options
and warrants -- -- -- 125,000
Amortization -- -- -- 61,979
Changes in assets and liabilities:
Accounts receivable 263,343 (813,327) (248,174) 279,328
Inventory 39,296 423,096 1,109,239 (117,215)
Prepaid expenses 17,429 60,501 14,560 (21,884)
Other assets -- (39,533) -- 3,186
Accounts payable 201,952 577,826 660,135 (361,256)
Deferred revenue 30,250 (116,427) (290,584) 99,767
Accrued expenses 149,066 55,325 100,319 (123,741)
------------ ------------ -------------- -------------
Net cash used in operating activities 27,710 (579,307) (610,027) (2,474,234)
Cash flows from investing activities:
Capital expenditures -- (253,800) (463,800) (39,050)
------------ ------------ -------------- -------------
Net cash used in investing activities -- (253,800) (463,800) (39,050)
Cash flows from financing activities:
Proceeds from issuance of nonconvertible debt -- -- 16,000 110,521
Principal payments on nonconvertible debt (7,266) (20,108) (26,015) (74,894)
Proceeds from capital lease -- 250,000 460,000 --
Payments on capital lease (10,500) (12,500) (41,667) --
Proceeds from issuance of stock (net) -- -- -- 3,086,749
------------ ----------- ------------- ------------
Net cash provided from financing activities (17,766) 217,392 408,318 3,122,376
Net increase (decrease) in cash 9,944 (615,715) (665,509) 609,092
------------ ------------ -------------- ------------
Cash, beginning of period 5,686 671,195 671,195 62,103
------------ ------------ -------------- ------------
Cash, end of period $15,630 $55,480 $5,686 $671,195
============ ============ ============== ============
Supplemental cash flows information:
Cash paid during the period for interest $24,783 $8,091 $81,149 $111,132
Noncash items:
Debt and accrued interest converted to equity -- -- -- $1,536,848
Note issued for warrant exercise -- -- -- $125,000
Cancellation of note payable for warrant
exercise -- -- -- $98,841
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
INDUSTRIAL IMAGING CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Shareholders'
Paid-in Accumulated Note Equity
Shares Amount Capital Deficit Receivable (Deficit)
------ ------ --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 5,867,498 $ 58,675 $ 5,872,588 ($ 7,966,169)$ -- ($2,034,906)
Issuance of common stock for cash, net of
issuance costs of $265,410 3,000,000 30,000 2,704,590 2,734,590
Exercise of warrants 1,287,420 12,874 562,766 (125,000) 450,640
Compensation expense relating to warrants 125,000 125,000
Issuance of common stock for debt
conversions 735,283 7,353 1,529,495 1,536,848
Net loss (2,433,554) (2,433,554)
------------ ------------ ------------ -------------- ----------- ------------
Balance at March 31, 1998 10,890,201 108,902 10,794,439 (10,399,723) (125,000) 378,618
Net loss (2,028,426) (2,028,426)
------------ ------------ ------------ -------------- ----------- ------------
Balance at March 31, 1999 10,890,201 108,902 10,794,439 (12,428,149) (125,000) (1,649,808)
Net loss (718,275) (718,275)
------------ ------------ ------------ -------------- ----------- ------------
Balance at September 30, 1999 10,890,201 $108,902 $10,794,439 ($13,146,424) ($125,000) ($2,368,083)
============ ============= ============= ============== ============ ===========-
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
INDUSTRIAL IMAGING CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND DESCRIPTION OF BUSINESS
Nature of Business
AOI International, Inc. (formerly Triple I Corporation) ("Triple I") is
a wholly owned subsidiary of Industrial Imaging Corporation (the "Company").
Triple I, a Delaware corporation, was organized as a successor to AOI Systems,
Inc., whose assets and technologies it purchased in October 1992, for the
purpose of manufacturing and selling optical inspection systems in the printed
circuit board industry. The Company and Triple I operate under the trade name of
AOI International and have manufacturing operations based in Lowell,
Massachusetts with customers located in the United States, Europe, and Asia.
Exchange
On November 16, 1995, the Board of Directors of the Triple I approved a
transaction with Orbis, Inc. ("Orbis"), a publicly held corporation, whose only
activity had been expenses during the fiscal year relating to filing fees and
minimal overhead costs. Orbis had no significant revenue for the last four
fiscal years prior to the merger. On December 5, 1996, the Orbis shareholders
approved the transaction between Triple I and Orbis, whereby the shareholders of
Triple I exchanged 100% of the outstanding Common Stock of Triple I for 90% of
the outstanding common stock of Orbis (the "Exchange"). On February 1, 1997, the
Exchange was completed as the Company obtained approval from 100% of its
shareholders. The Exchange was accounted for as a capital stock transaction and
treated as a recapitalization of Triple I with Triple I as the acquiror (reverse
acquisition). The costs of the Exchange were charged to other expense and no
goodwill was recorded.
In connection with the Exchange, Orbis reincorporated from a Rhode
Island corporation to a Delaware corporation and changed its name to Industrial
Imaging Corporation via a merger of Orbis into Industrial Imaging Corporation.
As a result, Triple I became a wholly owned subsidiary of Industrial Imaging
Corporation.
B. MANAGEMENT'S FINANCING AND CAPITAL FORMATION PLANS
Since its inception, the Company has suffered recurring losses from
operations and has been unable to pay certain debt obligations. The remedies
available to the debt holders include immediate demand of payment and
foreclosure. These conditions raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. In view of
the Company's current financial condition, the Company plans to continue to
aggressively manage its working capital and expenses while pursuing the sale of
substantially all of its assets and the settlement of all of its creditors'
claims.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out (FIFO) basis.
6
<PAGE>
Property And Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are computed using the straight-line method over the lesser of the
estimated useful lives of the assets, 3 to 5 years, or lease term. Maintenance
and repair costs are expensed as incurred; renewals and betterments are
capitalized. Upon the sale or retirement of fixed assets, the accounts are
relieved of the cost and the related accumulated depreciation with any resulting
gain or loss included in income.
Patents
Purchased patents are valued at cost and amortized on a straight-line
basis over five years.
Revenue Recognition
Sales of inspection systems and evaluation units are recorded when
customer acceptance requirements are met. Revenue from service maintenance
contracts is deferred and is recognized ratably over the term of the contract,
generally one year. Revenue from government grants is recognized when specific
contract requirements have been met and no significant contingencies remain
under the contract. The Company generally requires payment from customers in
U.S. dollars as part of its normal payment terms. Fluctuations in foreign
exchange rates to date have not had a material effect on the Company's financial
statements.
Income Taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the use of an asset and liability approach for financial
accounting and reporting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the carrying amount and the tax basis of assets
and liabilities using the current statutory tax rates. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
Net Loss Per Common Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the
presentation of both basic and diluted earnings per share and replaces the
previously required standards for computing and presenting earnings per share.
Earnings per share amounts for all periods have been presented to conform to the
requirements of SFAS 128. The adoption of SFAS 128 had no effect on the
Company's financial statements.
Research And Development
Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. Cost reimbursement under
collaborative research agreements are recorded as offsets to research and
development expenses.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
7
<PAGE>
New Accounting Standards
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distribution to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. The Company has no items
of comprehensive income required to be recognized.
In fiscal 1999, the Company adopted SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information", which supercedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic area and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company does not believe that it has multiple operating
segments requiring separate disclosure.
Concentrations of Credit Risk
A significant portion of the Company's sales are to customers whose
principal activities relate to the printed circuit board industry, including a
heavy concentration of sales to customers in foreign countries. (See note P).
Although the Company generally requires advance deposits or letters of credit
from customers, the Company sometimes extends credit to its foreign customers
and collection may be more difficult in the event of a default.
D. ACCOUNTS RECEIVABLE
In the normal course of business, the Company extends credit terms on a
customer-by-customer basis based on its evaluation of collectibility exposure.
Management's estimates of losses in this area are recorded through an evaluation
of the adequacy of the allowance for doubtful accounts. The risk of loss from
any concentrations of credit risk with respect to trade receivables is mitigated
by management's evaluation, the policy of securing larger dollar sales with
substantial deposits at order and ship dates, and the incentive for customers to
maintain their credit standing in order to receive ongoing technical service.
During the six months ended September 30, 1999 and the years ended
March 31, 1999 and March 31, 1998, accounts receivable in the amounts of
$277,240, $1,535,260 and $1,174,763, respectively, were factored, without
recourse, to a related party. Specific invoices were sold under individual
purchase and sale agreements. The Company receives a portion of the value of a
receivable at the date of the sale. Subsequent receipts of sold receivables are
forwarded in full to the factor. Interest is calculated at Prime + 4% over the
time the money owed the factor is outstanding. The transaction is completed when
the Company receives the remaining balance of the receivable, net of interest
charges, from the factor. Interest on these contracts totaled $17,306, $53,739
and $72,967 during the six months ended September 30, 1999 and the years ended
March 31, 1999 and 1998, respectively.
E. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, March 31, March 31,
1999 1999 1998
<S> <C> <C> <C>
Raw materials........................... $ 569,920 $ 611,709 $ 746,748
Work in process......................... 125,200 121,396 366,320
Finished goods.......................... 151,539 152,850 882,126
--------------- ------------- --------------
........................................ $ 846,659 $ 885,955 $ 1,995,194
=============== ============= ==============
</TABLE>
8
<PAGE>
F PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, March 31, March 31,
1999 1999 1998
<S> <C> <C> <C>
Machinery and Equipment................. $ 55,613 $ 55,613 $ 55,613
Demonstration equipment on capital lease 210,000 210,000 --
Computer equipment, including $10,001 in capital
leases in 1999 and 1998 respectively.. 82,585 82,585 78,785
Computer software....................... 17,136 17,136 17,136
Furniture and fixtures.................. 44,752 44,752 44,752
--------------- ------------- --------------
410,086 410,086 196,286
Less: accumulated depreciation and amortization 213,022 168,373 137,136
--------------- ------------- --------------
$ 197,064 $ 241,713 $ 59,150
=============== ============= ==============
</TABLE>
Depreciation expense for the six months ended September 30, 1999 and
years ended March 31, 1999 and 1998, was $44,649, $93,737 and $14,156,
respectively.
G. INTANGIBLE ASSETS
The Company holds several patents that were purchased. These patents
are stated at the acquisition cost of $531,250 and have been fully amortized
using the straight-line method over 5 years. Amortization expense was $61,979
for the year ended March 31, 1998, the final year of amortization.
H. COMMITMENTS AND CONTINGENCIES
The Company was obligated under a lease agreement for an office and
manufacturing facility in Lowell, Massachusetts, that expired on November 30,
1998. The premises have been occupied on a month-to-month basis since the
termination of the lease. Under the terms of the lease and since expiration, the
Company paid base rent of $9,970 per month plus the Company's pro rata share of
certain costs paid by the landlord. Total rent expense was $102,444, $145,721
and $131,051 for the six months ended September 30, 1999 and years ended March
31, 1999 and 1998, respectively.
On November 28, 1994 the Company entered into an eight-year license and
collaboration agreement with Polaroid Corporation ("Polaroid") to promote the
development, marketing, and sales in the field of printed circuit board
production, and to collaborate in the fields of Automatic Inspection and PCB
PhotoTool generation. Under the Polaroid Agreement, the Company was required to
meet certain sales and performance milestones to maintain the Company's
exclusivity concerning the technology. The agreement was amended in Febuary 1999
to convert to a non-exclusive license.
I. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30, March 31, March 31,
1999 1999 1998
<S> <C> <C> <C>
Accrued vacation.................................... $ 79,202 $ 84,033 $ 89,866
Accrued professional fees........................... 100,874 88,874 110,886
Accrued payroll and related expenses................ 392,360 295,472 263,109
Accrued warranty.................................... 93,000 93,000 157,398
Accrued commissions................................. 138,343 138,343 61,806
Accrued interest and other.......................... 279,818 234,809 151,147
--------------- -------------- -------------
$ 1,083,597 $ 934,531 $ 834,212
=============== ============== =============
</TABLE>
9
<PAGE>
J. DEBT
The following is a summary of the Company's debt obligations:
<TABLE>
<CAPTION>
September 30, March 31, March 31,
1999 1999 1998
------------- --------- ---------
<S> <C> <C> <C>
Collateralized demand note with assignee for the benefit of creditors for the
former AOI Systems, Inc., due January 30, 1995. The note was renegotiated in
August 1997 to a five year payment schedule
including interest at a rate of 8.0%.......................................... $ 163,750 $ 163,750 $ 163,750
Uncollateralized subordinated note with a related party, principal
due December 31, 1996, interest rate of 8.4%, interest only
payments due quarterly........................................................ 50,000 50,000 50,000
Uncollateralized note with a related party, principal due October 23,
1996, interest rate of 10% payable at maturity................................ 1,520 1,520 1,520
Uncollateralized note with a related party, principal due October 23,
1996, interest rate of 10% payable at maturity................................ 100,000 100,000 100,000
Uncollateralized note with a related party, principal due June 6,
1996, interest rate of 10% payable at maturity................................ 15,000 15,000 15,000
Uncollateralized note with a related party, principal due June 6,
1996, interest rate of 10% payable at maturity................................ 15,000 15,000 15,000
Uncollateralized note with a related party, principal due June 6,
1996, interest rate of 10% payable at maturity................................ 5,000 5,000 5,000
Uncollateralized note with a related party, principal due June 6,
1996, interest rate of 10% payable at maturity................................ 50,000 50,000 50,000
Uncollateralized note with a related party, principal due January 15,
1999, interest rate of 10% payable at maturity................................ 150,000 150,000 150,000
Uncollateralized note with a related party, principal due January 21,
1999, interest rate of 10% payable at maturity................................ 50,000 50,000 50,000
Uncollateralized note with a related party, principal due February 6,
1999, interest rate of 10% payable at maturity................................ 50,000 50,000 50,000
Uncollateralized note with a related party, principal due February 6,
1999, interest rate of 10% payable at maturity................................ 50,000 50,000 50,000
Uncollateralized note with a related party, principal due February 6,
1999, interest rate of 10% payable at maturity................................ 50,000 50,000 50,000
Uncollateralized note with a related party, principal due February 6,
1999, interest rate of 10% payable at maturity................................ 25,000 25,000 25,000
Uncollateralized note with a related party, principal due February 6,
1999, interest rate of 10% payable at maturity................................ 25,000 25,000 25,000
Uncollateralized note with a related party, principal due February 11,
1999, interest rate of 10% payable at maturity................................ 50,000 50,000 50,000
Uncollateralized note, principal due in monthly payments of
$6,836 plus interest at 8.4%.................................................. -- -- 17,281
Uncollateralized note, due in monthly payments of
$1,856 with interest at 10.5%................................................. -- 7,266 --
Capital lease obligations....................................................... 199,500 210,000 --
------------ ---------- -----------
1,049,770 1,067,536 867,551
Less amounts due within one year................................................ 813,922 787,028 715,334
------------ ---------- -----------
235,848 280,508 152,217
</TABLE>
In August 1997, the Company renegotiated a collateralized demand note
payable, which was in default, to a new note with a fifty seven month
amortization including interest at 8% per annum. Unpaid interest was added to
the new principal which amounts to $163,750. The payments consist of twelve
payments of $1091, twelve payments of $2,500, twelve payments of $5,000, twelve
payments of $6,000, eight payments of $3,527, and one payment of
10
<PAGE>
$2,184. The Company also issued warrants to purchase 41,000 shares of the
Company's common stock at $4.00 per share through June 30, 2002. At the date of
the issuance, the value of the warrants was not material.
In November 1997, the Company offered a 50% discount of the exercise
price to all warrantholders of the Company's common stock for a specified period
of time. A director of the Company canceled a promissory note due from the
Company for $100,000 in exchange for the exercise of warrants at a total
exercise price of $98,480. The balance of the note payable plus accrued interest
is to be paid to the note holder in cash.
The above debt instruments contain numerous covenants and remedies upon
default including immediate demand of payment and foreclosure. As of September
30, 1999, the Company had not repaid various borrowings that had become due and
therefore is in default. In addition, the collateralized note is secured by all
assets of the Company.
K. SHAREHOLDERS' EQUITY
The Company has 10,890,201 shares of voting common stock issued and
outstanding at September 30, 1999, March 31, 1999 and March 31, 1998. Holders of
common stock are entitled to receive dividends only when declared by, and at the
discretion of, the Board of Directors. An aggregate of 800,000 shares of voting
common stock are reserved as follows: 200,000 shares for options under the 1993
Stock Option Plan; and 600,000 shares for options under the 1995 Stock Option
Plan.
The Company has authorized 1,300,000 shares of preferred stock, with a
par value of $.01 per share. At September 30, 1999, March 31, 1999 and March 31,
1998, no shares were issued and outstanding.
In November 1997, an outside investor executed a Securities purchase
agreement to invest $3 million in the Company by purchasing 3,000,000 shares of
the Company's common stock at $1.00 per share. In accordance with the agreement,
the Company also issued warrants to purchase 1,000,000 shares of common stock at
$1.00 per share through November 12, 2002, and issued warrants to purchase
1,000,000 shares of common stock at $2.00 per share through November 12, 2002.
The agreement was terminated with all rights and covenants with respect thereto,
by agreement in October 1999.
During the year ended March 31, 1998, the Company entered into various
agreements resulting in the issuance of 735,283 shares of common stock in
exchange for the release of amounts owed to various vendors amounting to
$1,536,848.
EARNINGS PER SHARE
In the last quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting standards No. 128, "Earnings per Share", which requires the
presentation for both basic and diluted earnings per share on the face of the
Statements of Operations and the restatement of all prior periods earnings per
share amounts. Assumed exercise of options and warrants are not included in the
calculation of diluted earnings per share since the effect would be
antidilutive. Accordingly, basic and diluted net loss per share do not differ
for any period presented.
The following table summarizes securities that were outstanding as of
September 30, 1999, March 31, 1999 and 1998 but not included in the calculation
of diluted net loss per share because such shares are antidilutive:
September 30, March 31, March 31,
1999 1999 1998
------------- ----------- ------------
Warrants 3,940,921 3,940,921 4,095,921
Stock Options 620,660 650,400 562,500
11
<PAGE>
L. STOCK WARRANTS
The Company has issued stock warrants as part of certain debt and
equity transactions and accounts for warrants when issued at fair value. At date
of issuance the value of these warrants was not material. The following
summarizes the warrant issuances for the three classes of stock authorized by
the Company.
Common Stock Warrants
Numerous warrants listed below provided antidilution provisions. The
number of shares and/or the share prices have been adjusted to reflect the
effect of the events triggering the antidilution provisions. In December 1993,
the Company issued to an officer, who personally guaranteed corporate
indebtedness, warrants to purchase 500,000 shares of common stock at $.50 per
share through December 22, 1998. These warrants were exercised at a discount in
November 1997. Also in December 1993, the Company issued in connection with
debt, warrants to purchase 20,000 shares of common stock at $.20 per share
through December 22, 2003. In August 1994, the Company issued to several
directors and stockholders, warrants to purchase 200,000 and 249,551 shares of
common stock at $1.00 per share, respectively through August 22, 2004 and August
22, 2002, respectively. In November 1997, 256,199 of these warrants were
exercised at a discount. In October 1994, the Company issued in connection with
debt, warrants to purchase 99,986 shares of common stock at $1.00 per share
through October 5, 2002. In November 1997, 44,989 of these warrants were
exercised at a discount. In December 1994, in connection with certain equity
financing, the Company issued warrants to purchase 100,014 shares of common
stock at $1.00 per share through December 15, 2002. In June 1995, the Company
issued in connection with debt, warrants to purchase 282,023 shares of common
stock at $1.00 per share through April 6, 2003. In May 1997, 100,014 of these
warrants were exercised. In November 1997, 71,989 of these warrants were
exercised at a discount.
In October 1995, in connection with debt, the Company issued warrants
to purchase 250,000 shares of common stock at $1.00 per share through October,
1998. In November 1997, 95,000 of these warrants were exercised at a discount
and the balance expired in October, 1998. The Company, in February 1996, also
issued warrants to purchase 150,000 shares of common stock at $1.00 per share
through February 1999, in conjunction with the debt conversion and forgiveness
of debt. In November 1997, these warrants were exercised at a discount. In
February 1997, the Company issued warrants to purchase 958,925 shares of common
stock at $1.00 per share through April 24, 2002 and are exercisable the earlier
of February 28, 2001, or when certain revenue or net income amounts are
attained.
In November 1997, the Company offered a 50% discount of the exercise
price to all warrantholders of the Company's common stock for a specified period
of time, which has expired. Warrantholders exercised warrants to purchase
1,187,406 shares of common stock at prices from $.25 per share to $.60 per
share. Warrants for the purchase of 3,137,396 shares of common stock were not
exercised resulting in the exercise price for the warrants reverting back to
their original exercise prices. In connection with this transaction, the Company
recognized a compensation charge of $125,000 in fiscal 1998. The Company
received $252,145 in cash, received a promissory note from an officer of the
Company for $125,000, interest and principal is payable in four years, and
accrues interest at an rate of 8.5% per annum. The stock purchased is pledged as
collateral against the note. In addition, a director of the Company cancelled a
promissory note due from the Company for $100,000 in exchange for the exercise
of warrants at a total exercise price of $98,480. The balance of the note
payable plus accrued interest were paid to the noteholder in cash.
Series B Preferred Stock Warrants
In 1994 the Company issued warrants for the purchase of 250,007 and
27,720 shares of Series B Preferred Stock at $1.00 per share through August 22,
2004 and December 22, 2003, respectively. In September 1994, the Company issued
warrants for the purchase of 22,176 shares of Series B Preferred Stock at $1.00
per share through September 15, 2004. All of these warrants were converted to
common stock warrants in February 1997.
12
<PAGE>
M. INCOME TAXES
At September 30, 1999 and at March 31, 1999, the Company had net
operating loss ("NOL") carryforwards of approximately $12,400,000 and
$11,700,000 respectively for federal and Massachusetts income tax purposes.
These carryforwards expire through 2014. In addition, the Company had Research
and Experimentation ("R&E") credit carryforwards of approximately $60,000 and
$25,000 for federal and Massachusetts income tax purposes, respectively.
Utilization of these NOL and R&E credit carryforwards may be limited pursuant to
the provisions of Section 382 of the Internal Revenue Code.
The components of the deferred tax assets and liabilities are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30, March 31, March 31,
1999 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Deferred Tax Assets/(Liabilities):
Accrued expenses and other..................................... $ 310 $ 310 $ 310
Patents........................................................ 136 136 136
R&E credits.................................................... 85 85 85
NOL carryforwards.............................................. 4,960 4,680 3,832
------------- ------------- -------------
Total deferred tax asset....................................... 5,491 5,211 4,363
Valuation allowance............................................ (5,491) (5,211) (4,363)
-------------- ------------- -------------
Net deferred tax asset......................................... -- -- --
============= ============= =============
</TABLE>
Due to the uncertainty surrounding the realization of the deferred tax
assets in future income tax returns, the Company has recorded a full valuation
allowance against its otherwise recognizable deferred tax assets.
N. EMPLOYEE BENEFIT PLAN
Effective October 26, 1992, the Company implemented a deferred
compensation plan (the "Plan") under Section 401(k) of the Internal Revenue
Code. Under the Plan, employees are permitted to contribute, subject to certain
limitations. The Company's contribution to the Plan is discretionary and the
Company has not contributed to the Plan since its inception. In January 1998,
the Company amended the plan to include a match of 50% of the first 7% of
employee contributions. The Plan was further amended in March 1999 to
discontinue this practice.
O. EMPLOYEE STOCK OPTION PLAN
During 1993, the Company adopted, subject to shareholder approval, a
stock award and incentive plan (the "1993 Plan") which permits the issuance of
options or stock appreciation rights (SARs) to selected employees and
independent contractors of the Company. The plan reserves 200,000 shares of
common stock for grant and provides that the term of each award be determined by
the Board of Directors charged with administering the plan. In 1996, the Company
adopted the 1995 Stock Option Plan (the "1995" Plan), which permits the issuance
of options or stock appreciation rights (SAR"S) to selected employees,
non-employee directors, and independent contractors of the Company. The plan
reserves 600,000 shares of common stock for grant and provides that the term of
each award be determined by the Board of Directors charged with administrating
the plan.
Under the terms of the plans, options granted may be either
nonqualified or incentive stock options and the exercise price, determined by
the Board of Directors, may not be less than the fair market value of a share on
the date of grant. SARs and limited SARs granted in tandem with an option shall
be exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. In
October 1997, 193,700 options were granted to employees and directors at $1.00
per share. In March 1999, 228,000 options were granted to employees and advisors
at $0.375 per share.
13
<PAGE>
Details of stock options are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Year ended March 31, 1998
Granted........................................... 193,700 1.00
Exercised......................................... 0
Canceled.......................................... 108,200
--------- -----
Outstanding at end of year........................ 562,500 .87
------- ----
Exercisable at end of year........................ 179,164 .69
========= ====
Year ended March 31, 1999
Granted........................................... 228,000 .375
Exercised......................................... 0
Canceled.......................................... 140,100
--------- -----
Outstanding at end of year........................ 650,400 .67
------- ----
Exercisable at end of year........................ 227,396 .69
========= ====
Six Months ended September 30, 1999
Granted........................................... 0
Exercised......................................... 0
Canceled.......................................... 29,740
---------
Outstanding at end of period...................... 620,660 .66
--------- ----
Exercisable at end of period...................... 227,348 .69
========= ===
</TABLE>
P. SIGNIFICANT CUSTOMERS AND DOMESTIC AND EXPORT SALES
Significant Customers
Sales to significant customers were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIGNIFICANT PERCENTAGE OF
MARCH 31 CUSTOMERS AMOUNT REVENUES
- ------------------------------------ --------- ------ ------------------
<S> <C> <C> <C>
1999................................ Customer A $661,360 17%
1999................................ Customer B $571,600 14%
1999................................ Customer C $505,000 13%
1999................................ Customer D $500,000 12%
1999................................ Customer E $422,500 11%
YEAR ENDED SIGNIFICANT PERCENTAGE OF
MARCH 31 CUSTOMERS AMOUNT REVENUES
- ------------------------------------ --------- ------ ------------------
1998................................ Customer A $909,835 40%
1998................................ Customer B $400,376 17%
1998................................ Customer C $250,000 11%
</TABLE>
14
<PAGE>
Domestic and Export Sales
Domestic and export sales as a percentage of revenues were as follows:
YEAR ENDED
MARCH 31, 1999
AMOUNT %
Domestic............................ $1,397,935 35%
Europe.............................. $2,599,266 65%
Asia................................ $ 10,070 0%
YEAR ENDED
MARCH 31, 1998
AMOUNT %
Domestic............................ $ 789,244 34%
Europe.............................. $1,389,134 60%
Asia................................ $ 126,831 6%
15
